Debtor entitled to a discharge if no objection is filed within the statutory time frame; creditors could not circumvent their untimely objection to discharge by filing motion to dismiss for “bad faith” filing; Per Fed. R. Bankr. P. 4004(c) debtor was entitled to his discharge:
ROSADO (In re Rosadao) v. PABLOS, et als., 2011 Bankr. LEXIS 3008 (BAP 1st Cir. 8/10/11)(Unpub).
PROCEDURAL: Appellant debtor sought an immediate discharge after the period for seeking denial of the debtor's discharge expired with no objections to discharge, but appellee creditors asserted that the debtor filed the bankruptcy case in bad faith. The debtor appealed the orders of the U.S. Bankruptcy Court which denied the debtor's motions for discharge and granted the creditors' motion to dismiss the debtor's case.
OVERVIEW: Although the creditors were granted extensions of time to object to the debtor's discharge, no objections were submitted, but the creditors subsequently brought untimely adversary proceedings seeking nondischargeability of specific debts. The bankruptcy appellate panel held that the debtor's discharge was improperly delayed since, under Fed. R. Bankr. P. 4004(c), the debtor was entitled to a discharge forthwith upon the expiration of the periods for moving for denial of discharge or dismissal, no such motions were filed, and the pending nondischargeability proceedings were not a proper basis for delaying the debtor's discharge.
OUTCOME: The orders denying the debtor's motions for discharge were reversed, the order dismissing the debtor's case was vacated, and the case was remanded for entry of a discharge and a redetermination of the motion to dismiss.
OVERVIEW: Although the creditors were granted extensions of time to object to the debtor's discharge, no objections were submitted, but the creditors subsequently brought untimely adversary proceedings seeking nondischargeability of specific debts. The bankruptcy appellate panel held that the debtor's discharge was improperly delayed since, under Fed. R. Bankr. P. 4004(c), the debtor was entitled to a discharge forthwith upon the expiration of the periods for moving for denial of discharge or dismissal, no such motions were filed, and the pending nondischargeability proceedings were not a proper basis for delaying the debtor's discharge.
OUTCOME: The orders denying the debtor's motions for discharge were reversed, the order dismissing the debtor's case was vacated, and the case was remanded for entry of a discharge and a redetermination of the motion to dismiss.
JUDGES: Before Bankruptcy Judges Hillman, Feeney and Kornreich, Opinion Per Curiam.
DISCUSSION: Several months later, the Debtor filed a motion for reconsideration of, inter alia, the order denying his second request for discharge. The bankruptcy court denied reconsideration as to the request for discharge because "at this point in time the court pursuant to Fed. R. Bankr. P. 4004(c)(1)(D) may not enter a discharge order because there is currently pending a motion to dismiss under § 707(a) of the Bankruptcy Code." The Panel denied as interlocutory the Debtor's request for leave to appeal the bankruptcy court's denial of his requests for discharge. Ultimately, the bankruptcy court issued its Opinion and Order granting the Appellees' motion to dismiss on the grounds that the Debtor filed his bankruptcy petition in bad faith under § 707(a). The Debtor appealed the order dismissing his case and listed in his statement of issues whether the bankruptcy court erred in failing to grant his requests for entry of discharge. The filing of a complaint to determine the dischargeability of a particular debt is not one of the grounds for deferring the entry of the discharge order. Because it had no basis upon which to delay or deny the entry of the discharge, the bankruptcy court was required to grant the discharge "forthwith. " As none of the other enumerated exceptions apply herein, the Court is compelled to enter a discharge pursuant to Rule 4004(c)."). Accordingly, the bankruptcy court abused its discretion and erred when it denied the Debtor's requests for entry of his discharge.
DISCUSSION: Several months later, the Debtor filed a motion for reconsideration of, inter alia, the order denying his second request for discharge. The bankruptcy court denied reconsideration as to the request for discharge because "at this point in time the court pursuant to Fed. R. Bankr. P. 4004(c)(1)(D) may not enter a discharge order because there is currently pending a motion to dismiss under § 707(a) of the Bankruptcy Code." The Panel denied as interlocutory the Debtor's request for leave to appeal the bankruptcy court's denial of his requests for discharge. Ultimately, the bankruptcy court issued its Opinion and Order granting the Appellees' motion to dismiss on the grounds that the Debtor filed his bankruptcy petition in bad faith under § 707(a). The Debtor appealed the order dismissing his case and listed in his statement of issues whether the bankruptcy court erred in failing to grant his requests for entry of discharge. The filing of a complaint to determine the dischargeability of a particular debt is not one of the grounds for deferring the entry of the discharge order. Because it had no basis upon which to delay or deny the entry of the discharge, the bankruptcy court was required to grant the discharge "forthwith. " As none of the other enumerated exceptions apply herein, the Court is compelled to enter a discharge pursuant to Rule 4004(c)."). Accordingly, the bankruptcy court abused its discretion and erred when it denied the Debtor's requests for entry of his discharge.
Stay relief denied to mortgagee in single asset real estate case because transfer of the property at issue from a realty trust an entity created in order to qualify for Chapter 11 relief was not per se bad faith; Debtor was required to make adequate protection payments by timely paying real estate tax bills; Court did not address the issue of the pre-petition stay relief waivers as the motion for relief was on filed other grounds.
In re: LOUCHESCHÌ LLC, 2011 Bankr. LEXIS 2983 (Bankr. D. Mass 8/2/11)
PROCEDURAL: Movant, the creditor bank holding a first mortgage, was seeking to foreclose on property transferred to the debtor, moved for relief from the automatic stay for cause pursuant to 11 U.S.C.S. § 362(d)(1). The debtor's single asset was a partially completed eight unit oceanfront residential condominium project.
OVERVIEW: Creditor bank asserted it was entitled to relief as a result of a lack of adequate protection of its security interest in the property and the bad faith of the debtor and its principals in causing title to the property to be transferred from the borrower and mortgagor, a realty trust owned by the same principals as the debtor, to the debtor on the day of the scheduled foreclosure sale of the property. The property was conveyed to an entity that qualified for chapter 11 relief. The court did not find the debtor's principals' transfer of the property to have been in bad faith. The filing of bankruptcy for the purpose of frustrating a secured party's imminent efforts to foreclose is not in and of itself bad faith. Debtor could demonstrate a reasonable possibility of a successful reorganization within a reasonable time. Because the case involved single asset real estate and, pursuant to 11 U.S.C.S. § 362(d)(3), the debtor was obligated to either file a plan of reorganization or begin making monthly debt service payments to creditor bank. Its secured position would deteriorate to the extent real estate tax bills rendered post-petition were not paid.
OUTCOME: Creditor bank's motion for relief from the automatic stay was denied. The debtor was obligated to pay, as adequate protection, all real estate tax bills rendered on the property since the chapter 11 petition date in full as they became due.
OVERVIEW: Creditor bank asserted it was entitled to relief as a result of a lack of adequate protection of its security interest in the property and the bad faith of the debtor and its principals in causing title to the property to be transferred from the borrower and mortgagor, a realty trust owned by the same principals as the debtor, to the debtor on the day of the scheduled foreclosure sale of the property. The property was conveyed to an entity that qualified for chapter 11 relief. The court did not find the debtor's principals' transfer of the property to have been in bad faith. The filing of bankruptcy for the purpose of frustrating a secured party's imminent efforts to foreclose is not in and of itself bad faith. Debtor could demonstrate a reasonable possibility of a successful reorganization within a reasonable time. Because the case involved single asset real estate and, pursuant to 11 U.S.C.S. § 362(d)(3), the debtor was obligated to either file a plan of reorganization or begin making monthly debt service payments to creditor bank. Its secured position would deteriorate to the extent real estate tax bills rendered post-petition were not paid.
OUTCOME: Creditor bank's motion for relief from the automatic stay was denied. The debtor was obligated to pay, as adequate protection, all real estate tax bills rendered on the property since the chapter 11 petition date in full as they became due.
JUDGE: Melvin S. Hoffman, Bankruptcy Judge.
DISCUSSION: Both Mr. Cheschi and Mr. Belli, the debtor's principals, testified that they first learned of LBM's pending foreclosure sale of the property on June 14, 2011. Mr. Cheschi learned about it from a friend who had seen it advertised and Mr. Cheschi told Mr. Belli. Neither man had received any formal notice from LBM. Mr. Cheschi testified he consulted an attorney with the intention of filing a Chapter 11 petition for Bell-Ches Realty Trust in order to stop the foreclosure sale but the attorney told him a realty trust could not file a Chapter 11 petition and counseled him to cause title to the Dennisport property to be conveyed to an entity that qualified for Chapter 11 relief. The next morning Mr. Cheschi and Mr. Belli caused the property to be transferred to the debtor, Loucheschi LLC, of which they are the sole members, for the stated consideration of less than $100 and approximately one hour before the scheduled foreclosure sale, Loucheschi filed its Chapter 11 petition. As of the Chapter 11 petition date, the condominium project remains incomplete. It consists of one L-shaped building containing eight units of approximately similar size. Two corner units have full ocean views, two other units offer partial views and four units afford no water vistas whatsoever. The structure is essentially weathertight but the interior units and common areas are unfinished. LBM's construction specialist, Charles Martin, testified that the current cost to complete construction of the project is $1,996,530. The parties have stipulated that the current fair market value of the property is $2,400,000 and its liquidation value is $1,600,000.
The debtor's witness on valuation, Richard Martin, a Cape Cod real estate broker, testified that the value of the units if they were complete would be $850,000-$950,000 each for the two prime ocean view units, $800,000 each for the two partial view units and $550,000-$700,000 each for the four remaining units, for a total value of $5,500,000-$6,300,000. Mr. Martin acknowledged on cross-examination that the current market for condominium units on Cape Cod was poor.
LBM presented evidence that as of July 15, 2011, the balance due on its loan to the Bell-Ches Realty Trust was $5,640,365.65. In its motion for relief from stay, LBM stated that the total balance due under the note as of June 15, 2011, the petition date, was $5,986,584.81. As to the prospects for completion of the project, the debtor offered the testimony of Mr. Depietri of D&D Capital LLC who testified that his company was prepared to make an "equity loan" to the debtor as part of a plan of reorganization to fund the completion in stages and sale of units at the project. I understood Mr. Depietri's explanation of "equity loan" to mean his company proposed to sponsor a plan of reorganization in exchange for all or most of the equity in the reorganized debtor. Mr. Depietri testified that his company would consider allowing Messrs. Belli and Cheschi to participate as minority owners of the reorganized debtor but only if they were prepared to invest new money into the project. Mr. Depietri testified that based on the expected value of the units upon completion, D&D could sponsor a plan of reorganization that would provide ongoing debt service payments to LBM and ultimately result in the payoff of LBM's loan from unit sales as well as provide a dividend to the debtor's general unsecured creditors. Mr. Depietri did not offer any estimate as to how long a sale program would take.Bankruptcy Code § 362(d) mandates the granting of relief from stay upon a creditor's request either for cause including the lack of adequate protection (§ 362(d)(1)) or, if the estate involves property, if the debtor lacks equity in the property (§ 362(d)(2)(A)) and if the property is not necessary for an effective reorganization (§ 362(d)(2)(B)).
As to the issue of the debtor's likelihood of a successful reorganization, while it is true that the rescue plan for the debtor described by Mr. Depietri of D&D Capital is not far enough along to constitute a binding commitment to fund a plan of reorganization, under the circumstances of this case which has been pending for approximately 6 weeks, I find that it satisfies the United States Supreme Court's requirement that the debtor demonstrate "a reasonable possibility of a successful reorganization within a reasonable time." I find that this case involves single asset real estate and thus pursuant to Bankruptcy Code § 362(d)(3) the debtor is obligated on or before September 13, 2011 either to file a plan of reorganization or begin making monthly debt service payments to LBM. LBM and the debtor's other creditors will know soon enough if there will be a reorganization here. Having determined that the debtor has satisfied its burden of showing an effective reorganization in prospect, it is not necessary to address the second requirement for relief from stay under § 362(d)(2)-lack of equity.
As to adequate protection of LBM's interest in the debtor's property, I find that between now and the autumn when the debtor will be required to file a plan or begin making debt service payments to LBM, the Dennisport property will not suffer further weather related physical deterioration. LBM's secured position will deteriorate, however, to the extent real estate tax bills rendered postpetition are not paid. Accordingly, I will order the debtor to pay such real estate tax bills as they become due.
For all the foregoing reasons, LBM's motion of relief from stay is denied. The debtor shall pay all real estate tax bills rendered on the property since the Chapter 11 petition date in full as they become due.
DISCUSSION: Both Mr. Cheschi and Mr. Belli, the debtor's principals, testified that they first learned of LBM's pending foreclosure sale of the property on June 14, 2011. Mr. Cheschi learned about it from a friend who had seen it advertised and Mr. Cheschi told Mr. Belli. Neither man had received any formal notice from LBM. Mr. Cheschi testified he consulted an attorney with the intention of filing a Chapter 11 petition for Bell-Ches Realty Trust in order to stop the foreclosure sale but the attorney told him a realty trust could not file a Chapter 11 petition and counseled him to cause title to the Dennisport property to be conveyed to an entity that qualified for Chapter 11 relief. The next morning Mr. Cheschi and Mr. Belli caused the property to be transferred to the debtor, Loucheschi LLC, of which they are the sole members, for the stated consideration of less than $100 and approximately one hour before the scheduled foreclosure sale, Loucheschi filed its Chapter 11 petition. As of the Chapter 11 petition date, the condominium project remains incomplete. It consists of one L-shaped building containing eight units of approximately similar size. Two corner units have full ocean views, two other units offer partial views and four units afford no water vistas whatsoever. The structure is essentially weathertight but the interior units and common areas are unfinished. LBM's construction specialist, Charles Martin, testified that the current cost to complete construction of the project is $1,996,530. The parties have stipulated that the current fair market value of the property is $2,400,000 and its liquidation value is $1,600,000.
The debtor's witness on valuation, Richard Martin, a Cape Cod real estate broker, testified that the value of the units if they were complete would be $850,000-$950,000 each for the two prime ocean view units, $800,000 each for the two partial view units and $550,000-$700,000 each for the four remaining units, for a total value of $5,500,000-$6,300,000. Mr. Martin acknowledged on cross-examination that the current market for condominium units on Cape Cod was poor.
LBM presented evidence that as of July 15, 2011, the balance due on its loan to the Bell-Ches Realty Trust was $5,640,365.65. In its motion for relief from stay, LBM stated that the total balance due under the note as of June 15, 2011, the petition date, was $5,986,584.81. As to the prospects for completion of the project, the debtor offered the testimony of Mr. Depietri of D&D Capital LLC who testified that his company was prepared to make an "equity loan" to the debtor as part of a plan of reorganization to fund the completion in stages and sale of units at the project. I understood Mr. Depietri's explanation of "equity loan" to mean his company proposed to sponsor a plan of reorganization in exchange for all or most of the equity in the reorganized debtor. Mr. Depietri testified that his company would consider allowing Messrs. Belli and Cheschi to participate as minority owners of the reorganized debtor but only if they were prepared to invest new money into the project. Mr. Depietri testified that based on the expected value of the units upon completion, D&D could sponsor a plan of reorganization that would provide ongoing debt service payments to LBM and ultimately result in the payoff of LBM's loan from unit sales as well as provide a dividend to the debtor's general unsecured creditors. Mr. Depietri did not offer any estimate as to how long a sale program would take.Bankruptcy Code § 362(d) mandates the granting of relief from stay upon a creditor's request either for cause including the lack of adequate protection (§ 362(d)(1)) or, if the estate involves property, if the debtor lacks equity in the property (§ 362(d)(2)(A)) and if the property is not necessary for an effective reorganization (§ 362(d)(2)(B)).
As to the issue of the debtor's likelihood of a successful reorganization, while it is true that the rescue plan for the debtor described by Mr. Depietri of D&D Capital is not far enough along to constitute a binding commitment to fund a plan of reorganization, under the circumstances of this case which has been pending for approximately 6 weeks, I find that it satisfies the United States Supreme Court's requirement that the debtor demonstrate "a reasonable possibility of a successful reorganization within a reasonable time." I find that this case involves single asset real estate and thus pursuant to Bankruptcy Code § 362(d)(3) the debtor is obligated on or before September 13, 2011 either to file a plan of reorganization or begin making monthly debt service payments to LBM. LBM and the debtor's other creditors will know soon enough if there will be a reorganization here. Having determined that the debtor has satisfied its burden of showing an effective reorganization in prospect, it is not necessary to address the second requirement for relief from stay under § 362(d)(2)-lack of equity.
As to adequate protection of LBM's interest in the debtor's property, I find that between now and the autumn when the debtor will be required to file a plan or begin making debt service payments to LBM, the Dennisport property will not suffer further weather related physical deterioration. LBM's secured position will deteriorate, however, to the extent real estate tax bills rendered postpetition are not paid. Accordingly, I will order the debtor to pay such real estate tax bills as they become due.
For all the foregoing reasons, LBM's motion of relief from stay is denied. The debtor shall pay all real estate tax bills rendered on the property since the Chapter 11 petition date in full as they become due.
Chapter 7 trustee lacks constitutional authority for the bankruptcy court to adjudicate a fraudulent transfer action against an entity who was not the debtor and had not filed a POC in the case; case must be tried by the District Court:
SITKA ENTERPRISES, INC. v. WILFREDO SEGARRA-MIRANDA, Defendant-Appellee2011 U.S. Dist. LEXIS 90243 (D.P).R. 8/10/11).
JUDGE: Carmen Consuelo Cerezo, District Judge.
BACKGROUND: The trustee of the estate of debtors José de Jesús-González and Nitxa García-Reyes filed on October 7, 2009 an amended complaint against debtors as defendants, their son and daughter and respective spouses, BDJ Limited Partnership, S.E., Berríos and Longo Law Offices, P.S.E. and Sitka Enterprises, Inc. and Fernando Longo-Quiñones, which primarily seeks to void allegedly fraudulent transfers of property of the debtors' estate under 11 U.S.C. § 548(a)(1) and 549(a)(1) & (2). The property is described in the amended complaint as a lot of land in Barceloneta, Puerto Rico, in which a shopping center was developed. The parties involved in the alleged fraudulent transfer, pre and post-petition, are the debtors, Berríos & Longo and Fernando Longo, a partner of that firm who is said to have had a long-standing relationship with debtors and with a family corporation. The trustee requested that the transfer of the property be set aside and that a mortgage allegedly illegally created over said property be voided, as well as compensatory and punitive damages. The trustee also requested that the transfer of shares by debtors to their son and daughter be voided.
BACKGROUND: The trustee of the estate of debtors José de Jesús-González and Nitxa García-Reyes filed on October 7, 2009 an amended complaint against debtors as defendants, their son and daughter and respective spouses, BDJ Limited Partnership, S.E., Berríos and Longo Law Offices, P.S.E. and Sitka Enterprises, Inc. and Fernando Longo-Quiñones, which primarily seeks to void allegedly fraudulent transfers of property of the debtors' estate under 11 U.S.C. § 548(a)(1) and 549(a)(1) & (2). The property is described in the amended complaint as a lot of land in Barceloneta, Puerto Rico, in which a shopping center was developed. The parties involved in the alleged fraudulent transfer, pre and post-petition, are the debtors, Berríos & Longo and Fernando Longo, a partner of that firm who is said to have had a long-standing relationship with debtors and with a family corporation. The trustee requested that the transfer of the property be set aside and that a mortgage allegedly illegally created over said property be voided, as well as compensatory and punitive damages. The trustee also requested that the transfer of shares by debtors to their son and daughter be voided.
PROCEDURAL: Before the Court is an Appeal filed by Sitka Enterprises, Inc., Berríos & Longo, P.S.C. and Fernando E. Longo from an Opinion and Order issued by the U.S. Bankruptcy Court for the District of Puerto Rico denying defendant's motion to dismiss for lack of jurisdiction. Trustee/appellee concedes that although appellants did not file a Rule 8003(a) motion for leave to appeal, the Court can consider the Notice of Appeal which was timely filed as said motion for leave to appeal pursuant to Rule 8003(c). Having considered the Notice of Appeal as a motion for leave to appeal, leave to appeal is GRANTED.
This brings us to the motion to dismiss the appeal as an interlocutory appeal. The claim made is that the order denying the motion to dismiss for lack of jurisdiction is an interlocutory non-appealable order which fails to comply with the criteria of 28 U.S.C. § 1292(b). However, this appeal turns on a controlling question of law recently decided by the Supreme Court of the United States in Stern v. Marshall, 131 S.Ct. 2594, 180 L. Ed. 2d 475 (2011), decided on June 23, 2011, regarding the lack of constitutional authority of the Bankruptcy Court as a non-Article III court to adjudicate a trustee's action to recover a fraudulent conveyance characterized as an action involving private rather than public rights.
The Stern decision has its roots in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989). There the Court rejected a bankruptcy trustee's argument that a fraudulent conveyance action filed on behalf of the bankruptcy estate against a creditor who has not submitted a proof of claim against the estate in the bankruptcy proceeding fell within the public rights exception which would allow its adjudication by a non-Article III court. The question presented in Granfinanciera was "whether a person who has not submitted a claim against a bankruptcy estate has a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer." Id., at p. 2787. The Court held that the Seventh Amendment entitles such a person to a trial by jury, notwithstanding Congress' designation of fraudulent conveyance actions as core proceedings in 28 U.S.C. § 157(b)(2)(H)." Id., at p. 2787. Justice Brennan made repeated references in his analysis and resolution of this controversy within the ambit of the Seventh Amendment to the fact that Congress' power to place adjudicative authority in non-Article III tribunals is limited. The Court expressly stated in Granfinanciera that "[i]n addition to our Seventh Amendment precedents, we therefore rely on our decisions exploring the restrictions Article III places on Congress' choice of adjudicative bodies to resolve disputes over statutory rights to determine whether petitioners are entitled to a jury trial." Id., at pp. 2796-2797. Expanding on the distinction between an action that involves public rights and one such as a fraudulent conveyance action which involves rights between private parties, the Court stated that:
The crucial question, in cases not involving the federal Government, is whether "Congress, acting for a valid legislative purpose pursuant to its constitutional powers under Article I, [has] create[d] a seemingly 'private' right that is so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution with limited involvement by the Article III judiciary."
Id., at p. 2797 (citations omitted).
It added that: "If a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court." Id.
The Article III restrictions on Congress' assignment of adjudication of claims to non-Article III courts is clearly addressed in the following statement at p. 2796 of Granfinanciera:
It added that: "If a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court." Id.
The Article III restrictions on Congress' assignment of adjudication of claims to non-Article III courts is clearly addressed in the following statement at p. 2796 of Granfinanciera:
Indeed, our decisions point to the conclusion that, if a statutory cause of action is legal in nature, the question whether the Seventh Amendment permits Congress to assign its adjudication to a tribunal that does not employ juries as fact finders requires the same answer as the question whether Article III allows Congress to assign adjudication of that cause of action to a non-Article III tribunal. For if a statutory cause of action, such as respondent's right to recover a fraudulent conveyance under 11 U.S.C. § 548(a)(2) is not a "public right" for Article III purposes, then Congress may not assign its adjudication to a specialized non-Article III court lacking "the essential attributes of the judicial power."
It was precisely the concern over such a limitation - that Congress may not assign to a non-Article III court for adjudication an action that does not involve public rights - that led the Court to conclude in Stern v. Marshall, 131 S.Ct. 2594, 180 L. Ed. 2d 475 (2011), a case involving a counterclaim brought by the bankrupt against a creditor in her bankruptcy proceeding for tortious interference under Texas law that:
The Bankruptcy Court in this case exercised the judicial power of the United States by entering final judgment on a common law tort claim, even though the judges of such courts enjoy neither tenure during good behavior nor salary protection. We conclude that, although the Bankruptcy Court had the statutory authority to enter judgment on Vickie's counterclaim, it lacked the constitutional authority to do so.
Stern, at p. 2601. Making extensive references to its decision in Granfinanciera, which had rejected the trustee's argument that a fraudulent conveyance action by a bankruptcy trustee fell within the public rights exception, the Court noted:
We explained that, "[i]f a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court." Id., at 54—55, 109 S.Ct. 2782. We reasoned that fraudulent conveyance suits were "quintessentially suits at common law that more nearly resemble state law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res." Id., at 56, 109 S.Ct. 2782. As a consequence, we concluded that fraudulent conveyance actions were "more accurately characterized as a private rather than a public right as we have used those terms in our Article III decisions."
Id., at p. 2614. At footnote 7, the Court stated outright that "Congress could not constitutionally assign resolution of the fraudulent conveyance action to a non-Article III court." Id.
Given this definitive finding by the Court in Stern, the resolution of the fraudulent conveyance action brought by the trustee in this case cannot be adjudicated by the Bankruptcy Court since it lacks constitutional authority to do so under the restrictions placed by Article III.
Accordingly, pursuant to the decision of the U.S. Supreme Court in Stern, the Court DENIES the motion to dismiss the appeal filed by the trustee and GRANTS the appeal of the order denying the motion to dismiss for lack of jurisdiction since the fraudulent conveyance action brought by the trustee cannot be adjudicated by the Bankruptcy Court, a non-Article III court, for lack of constitutional authority to do so. Such action, in compliance with Article III, must be adjudicated by the U.S. District Court. The case is REMANDED to the Bankruptcy Court to proceed in conformity with this Order.
Given this definitive finding by the Court in Stern, the resolution of the fraudulent conveyance action brought by the trustee in this case cannot be adjudicated by the Bankruptcy Court since it lacks constitutional authority to do so under the restrictions placed by Article III.
Accordingly, pursuant to the decision of the U.S. Supreme Court in Stern, the Court DENIES the motion to dismiss the appeal filed by the trustee and GRANTS the appeal of the order denying the motion to dismiss for lack of jurisdiction since the fraudulent conveyance action brought by the trustee cannot be adjudicated by the Bankruptcy Court, a non-Article III court, for lack of constitutional authority to do so. Such action, in compliance with Article III, must be adjudicated by the U.S. District Court. The case is REMANDED to the Bankruptcy Court to proceed in conformity with this Order.
Russian lender created sufficient contacts to be haled into bankruptcy court for suit:
IN RE CYPHERMINT, INC.; JOINT STOCK COMPANY, a/k/a SAINT PETERSBURG INVESTMENTS COMPANY v. JOSEPH H. BALDIGA; TAVRICHESKY COMMERCIAL BANK OF SAINT PETERSBURG v. JOSEPH H. BALDIGA, 2011 U.S. Dist. LEXIS 88774 (D. Mass. 8/10/11)
OVERVIEW: A bankruptcy trustee alleged that a debtor, a U.S. corporation, made preferential or fraudulent transfers to defendant creditors, Russian corporations. Defendants argued that the bankruptcy court erred in concluding that defendants' contacts with the United States were sufficient to subject them to personal jurisdiction. The trustee made a prima facie showing of personal jurisdiction under the Due Process Clause of the Fifth Amendment because the debtor's former president averred that defendants exerted control over funds they loaned to the debtor and over the debtor's business operations.
PROCEDURAL: In this bankruptcy appeal, appellants Joint Stock Company, also known as Saint Petersburg Investments Company (SPIC), and Tavrichesky Commercial Bank of Saint Petersburg (Tavrichesky), seek to reverse the Bankruptcy Court's denial of their motions to dismiss adversary proceedings.
OUTCOME: The court affirmed the bankruptcy court's denial of defendants' motions to dismiss.
PROCEDURAL: In this bankruptcy appeal, appellants Joint Stock Company, also known as Saint Petersburg Investments Company (SPIC), and Tavrichesky Commercial Bank of Saint Petersburg (Tavrichesky), seek to reverse the Bankruptcy Court's denial of their motions to dismiss adversary proceedings.
OUTCOME: The court affirmed the bankruptcy court's denial of defendants' motions to dismiss.
JUDGE: Richard G. Stearns, District Judge.
BACKGROUND: SPIC and Tavrichesky are Russian corporations located in St. Petersburg, Russia. Cyphermint is a New York corporation headquartered in Marlborough, Massachusetts. Between 2000 and 2007, SPIC and Tavrichesky made a number of loans to Cyphermint, which were deposited in Cyphermint's United States bank accounts. Between October 27, 2006, and June 8, 2008, Cyphermint made payments by wire transfer to SPIC in the aggregate amount of $1,665,192.31, and to Tavrichesky in the aggregate amount of $5,446,141.24. On June 13, 2008, two UCC Financing Statements in the names of SPIC and Tavrichesky, respectively, were filed with the New York Secretary of State. The Financing Statements claimed as collateral all of Cyphermint's rights in its intellectual property.
On August 21, 2008, three creditors of Cyphermint filed an involuntary petition under Chapter 7 of the United States Bankruptcy Code. On June 29, 2009, Joseph Baldiga, the trustee of Cyphermint, filed adversarial complaints against SPIC and Tavrichesky, alleging that the wire transfer payments and the UCC Financing Statements constituted preferential and/or fraudulent transfers.
On September 26, 2010, both SPIC and Tavrichesky filed motions to dismiss the adversary proceedings on three identical grounds: (1) improper service of process; (2) lack of personal jurisdiction; and (3) forum non conveniens. On November 10, 2010, the United States Bankruptcy Court for the District of Massachusetts held concurrent hearings on the motions. In a Memorandum and Order issued on February 22, 2011, United States Bankruptcy Judge Melvin S. Hoffman denied defendants' motions to dismiss, holding that: (1) service was proper; (2) the exercise of personal jurisdiction was appropriate; and (3) defendants had failed to establish that any adequate alternative forum was available. On March 24, 2011, both defendants filed motions for leave to appeal, which this court granted. As defendants present no arguments regarding the Bankruptcy Court's holdings with respect to the claims of improper service and forum non conveniens, these issues are deemed waived. Under Rule 7004(f) of the Federal Rules of Bankruptcy Procedure, 2 "a court has personal jurisdiction over a defendant if three requirements are met: (1) service of process has been made in accordance with Bankruptcy Rule 7004 or Civil Rule 4; (2) the court has subject matter jurisdiction under section 1334 of the Code [28 U.S.C. § 1334]; and (3) exercise of jurisdiction is consistent with the Constitution and laws of the United States." On appeal, the parties do not dispute that service was proper, or that the court has subject matter jurisdiction. Defendants argue rather that the third prong of the test has not been met.
BACKGROUND: SPIC and Tavrichesky are Russian corporations located in St. Petersburg, Russia. Cyphermint is a New York corporation headquartered in Marlborough, Massachusetts. Between 2000 and 2007, SPIC and Tavrichesky made a number of loans to Cyphermint, which were deposited in Cyphermint's United States bank accounts. Between October 27, 2006, and June 8, 2008, Cyphermint made payments by wire transfer to SPIC in the aggregate amount of $1,665,192.31, and to Tavrichesky in the aggregate amount of $5,446,141.24. On June 13, 2008, two UCC Financing Statements in the names of SPIC and Tavrichesky, respectively, were filed with the New York Secretary of State. The Financing Statements claimed as collateral all of Cyphermint's rights in its intellectual property.
On August 21, 2008, three creditors of Cyphermint filed an involuntary petition under Chapter 7 of the United States Bankruptcy Code. On June 29, 2009, Joseph Baldiga, the trustee of Cyphermint, filed adversarial complaints against SPIC and Tavrichesky, alleging that the wire transfer payments and the UCC Financing Statements constituted preferential and/or fraudulent transfers.
On September 26, 2010, both SPIC and Tavrichesky filed motions to dismiss the adversary proceedings on three identical grounds: (1) improper service of process; (2) lack of personal jurisdiction; and (3) forum non conveniens. On November 10, 2010, the United States Bankruptcy Court for the District of Massachusetts held concurrent hearings on the motions. In a Memorandum and Order issued on February 22, 2011, United States Bankruptcy Judge Melvin S. Hoffman denied defendants' motions to dismiss, holding that: (1) service was proper; (2) the exercise of personal jurisdiction was appropriate; and (3) defendants had failed to establish that any adequate alternative forum was available. On March 24, 2011, both defendants filed motions for leave to appeal, which this court granted. As defendants present no arguments regarding the Bankruptcy Court's holdings with respect to the claims of improper service and forum non conveniens, these issues are deemed waived. Under Rule 7004(f) of the Federal Rules of Bankruptcy Procedure, 2 "a court has personal jurisdiction over a defendant if three requirements are met: (1) service of process has been made in accordance with Bankruptcy Rule 7004 or Civil Rule 4; (2) the court has subject matter jurisdiction under section 1334 of the Code [28 U.S.C. § 1334]; and (3) exercise of jurisdiction is consistent with the Constitution and laws of the United States." On appeal, the parties do not dispute that service was proper, or that the court has subject matter jurisdiction. Defendants argue rather that the third prong of the test has not been met.
To satisfy the third prong, Bankruptcy Court's assertion of personal jurisdiction must be consistent with the Due Process Clause of the Fifth Amendment. See United Elec., Radio & Mach. Workers of Am. v. 163 Pleasant St. Corp., 960 F.2d 1080, 1085 (1st Cir. 1992) ("When a district court's subject matter jurisdiction is founded upon a federal question, the constitutional limits of the court's personal jurisdiction are fixed, in the first instance, not by the Fourteenth Amendment but by the Due Process Clause of the Fifth Amendment. . . . In such circumstances, the Constitution requires only that the defendant have the requisite 'minimum contacts' with the United States, rather than with the particular forum state (as would be required in a diversity case."). Here, the Bankruptcy Court found that the trustee proffered sufficient evidence to establish the existence of "substantial contact between the defendants and the United States, relying primarily on the affidavit of Joseph Barboza, who was President and CEO of Cyphermint from January of 2003 through April of 2008. Specifically, the Bankruptcy Court cited Barboza's testimony that: (1) Cyphermint maintained bank accounts only in the United States; (2) defendants made multiple loans to Cyphermint through various contracts and loan agreements; (3) defendants and their affiliates funded almost all of Cyphermint's start-up and operational costs; and (4) defendants exerted influence and control over the funds that they had loaned to Cyphermint, as well as the business operations of Cyphermint, through Ivan V. Kuznetsov, who substantially controls (or controlled) both defendants. The trustee is not arguing that passive investment confers jurisdiction. Rather, he contends that the use of the investment as a lever to exert control constitutes a substantial contact. Barboza testified that Kuznetsov "owns 40% of Tavrichesky and entities controlled by Kuznetsov controlled 47% of [Cyphermint]. Kuznetsov was also [Cyphermint's] Clerk and a Director of [Cyphermint]. Kuznetsov occasionally visited [Cyphermint's] headquarters.The Bankruptcy Court further observed that both defendants filed financing statements in New York in an effort to perfect their alleged security interests in [Cyphermint's] assets. The defendants purposefully availed themselves of the benefits and protections of conducting business in the United States and thus the exercise of jurisdiction over their persons will not offend traditional notions of fair play and substantial justice embodied in the Fifth Amendment.
“Drop ship” may be subject to reclamation administrative expense claim for 20 day pre-petition, if debtor had actual or constructive possession; § 502(d) was inapplicable to administrative expense claims – debtor could not disallow an administrative expenses claim because the vendor was allegedly the recipient of an avoidable transfer under § 547:
In re: Momenta, Inc., 2011 BNH 10; 2011 Bankr. LEXIS 3095 (Bankr. D.N.H. 8/19/11).
PROCEDURAL POSTURE: A vendor of Chapter 11 debtor filed a motion for the allowance of an administrative expense claim of $163,527.95 pursuant to 11 U.S.C.S. § 503(b)(9).
OVERVIEW: The debtor ordered goods from the vendor that were delivered to the debtor or its customers. Although the debtor conceded that two shipments gave rise to an administrative expense claim since they were received by the debtor, the debtor claimed that the shipments that were delivered by the vendor directly to the debtor's customers ("drop shipments") were not entitled to allowance as an administrative expense because they were not "received by the debtor," within the meaning of § 503(b)(9). The debtor also argued that any administrative expense claim had to be disallowed under 11 U.S.C.S. § 502(d) because the vendor was the recipient of an avoidable transfer under 11 U.S.C.S. § 547. The court held that a seller was entitled to an administrative expense claim where a debtor received goods, by having either physical possession or constructive possession as specified in U.C.C. § 2-705(2), within 20 days of the commencement of the bankruptcy case. The record failed to establish, or even suggest, any physical or constructive possession by the debtor in reference to any of the drop shipment transactions. The court also held that § 502(d) was inapplicable to administrative expense claims.
OUTCOME: The court allowed only an administrative expense claim of $23,070.95.
OVERVIEW: The debtor ordered goods from the vendor that were delivered to the debtor or its customers. Although the debtor conceded that two shipments gave rise to an administrative expense claim since they were received by the debtor, the debtor claimed that the shipments that were delivered by the vendor directly to the debtor's customers ("drop shipments") were not entitled to allowance as an administrative expense because they were not "received by the debtor," within the meaning of § 503(b)(9). The debtor also argued that any administrative expense claim had to be disallowed under 11 U.S.C.S. § 502(d) because the vendor was the recipient of an avoidable transfer under 11 U.S.C.S. § 547. The court held that a seller was entitled to an administrative expense claim where a debtor received goods, by having either physical possession or constructive possession as specified in U.C.C. § 2-705(2), within 20 days of the commencement of the bankruptcy case. The record failed to establish, or even suggest, any physical or constructive possession by the debtor in reference to any of the drop shipment transactions. The court also held that § 502(d) was inapplicable to administrative expense claims.
OUTCOME: The court allowed only an administrative expense claim of $23,070.95.
JUDGE: J. Michael Deasy, Bankruptcy Judge.
Discussion: Neither party submitted a stipulation of facts. However, Ningbo's Memo and the Debtor's Memo do contain mutual assertions of fact which are not disputed. Accordingly, the Court shall treat all mutually asserted undisputed facts as the factual record for the purposes of this decision. The Court will use this factual record to determine the following issues of law: (1) whether Ningbo should be allowed an administrative expense claim pursuant to 11 U.S.C. § 503(b)(9) because the Debtor received goods from Ningbo within twenty days of the bankruptcy petition, and (2) whether any administrative expense claim held by Ningbo should be disallowed under 11 U.S.C. § 502(d) because Ningbo was allegedly the recipient of a transfer avoidable under 11 U.S.C. § 547.
Discussion: Neither party submitted a stipulation of facts. However, Ningbo's Memo and the Debtor's Memo do contain mutual assertions of fact which are not disputed. Accordingly, the Court shall treat all mutually asserted undisputed facts as the factual record for the purposes of this decision. The Court will use this factual record to determine the following issues of law: (1) whether Ningbo should be allowed an administrative expense claim pursuant to 11 U.S.C. § 503(b)(9) because the Debtor received goods from Ningbo within twenty days of the bankruptcy petition, and (2) whether any administrative expense claim held by Ningbo should be disallowed under 11 U.S.C. § 502(d) because Ningbo was allegedly the recipient of a transfer avoidable under 11 U.S.C. § 547.
The Court will first address whether the Drop Shipments were "received by the debtor" under §503(b)(9), giving rise to an administrative expense claim, and then whether any administrative expense claim arising under § 503(b)(9) may be disallowed under § 502(d) due to an alleged preference claim against Ningbo.
BAPCPA added three new categories of administrative expense claims to § 503(b). Among the new categories is § 503(b)(9), which grants an administrative expense claim for "the value of goods received by the debtor within 20 days before the date of commencement of a case under this title in which goods have been sold to the debtor in the ordinary course of such debtor's business." 11 U.S.C. § 503(b)(9). The new subsection elevates certain prepetition unsecured obligations to a seller of goods, who would otherwise only have a general unsecured claim, to a priority administrative expense claim. Despite the potential significance of this additional priority administrative expense, there is little legislative history regarding the addition of § 503(b)(9).
The phrase "received by the debtor" is not a term of art nor is it a defined phrase in the Bankruptcy Code. Based on the express language of the Bankruptcy Code, its legislative history, and pre-BAPCPA practice, §§ 503(b)(9) and 546(c) are related provisions that should be read together.
The phrase "received by the debtor" is not a term of art nor is it a defined phrase in the Bankruptcy Code. Based on the express language of the Bankruptcy Code, its legislative history, and pre-BAPCPA practice, §§ 503(b)(9) and 546(c) are related provisions that should be read together.
Since Article 2 of the Uniform Commercial Code's ("UCC") right to reclamation lead to the enactment of § 546(c), it also proffers guidance in interpreting § 503(b)(9). As part of the Bankruptcy Reform Act of 1978, Congress adopted § 546(c) to resolve the question of whether the right of reclamation in UCC § 2-702(2) applies to a debtor in bankruptcy. Section 2-702(2) states that where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay. § 546(c) does not create an independent federal right of reclamation but simply allows a seller to exercise its state law remedies under the UCC with certain limitations. Since Congress borrowed from the UCC when enacting § 546(c), courts have found the UCC relevant when interpreting that section. In turn, the same UCC provisions are relevant when interpreting the requirements of § 503(b)(9). The term "received" in § 546(c) is the equivalent of "receipt" in the UCC, and the term "received" in §503(b)(9) shall be interpreted identically.
The Debtor argues that because it never took physical possession of the Drop Shipments, the goods were never "received by the debtor." Because the term "physical possession" is not defined in the Bankruptcy Code, the Court shall review the context of §§ 546(c) and 503(b)(9) and the interpretation of "physical possession" under the UCC. Possession may mean physical possession or constructive possession, or both. Therefore, when UCC § 2-702 is read in context of UCC § 2-705, the term "receives" must include the three forms of constructive possession listed in UCC § 2-705(2). Accordingly, the UCC provides a seller with the right to stop goods being shipped to an insolvent buyer until the buyer receives the goods by either having physical possession or by having constructive possession in one of the three forms listed in UCC § 2-705(2)(b). After a buyer has received goods in one of the ways listed in UCC § 2-705(2)(b), the right to stop delivery ends and the right to reclaim arises.
As against such buyer the seller may stop delivery until:
As against such buyer the seller may stop delivery until:
(a) receipt of the goods by the buyer; or
(b) acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer; or
(c) such acknowledgment to the buyer by a carrier by reshipment or as warehouseman; or
(d) negotiation to the buyer of any negotiable document of title covering the goods.
(b) acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer; or
(c) such acknowledgment to the buyer by a carrier by reshipment or as warehouseman; or
(d) negotiation to the buyer of any negotiable document of title covering the goods.
A seller must be entitled to an administrative expense claim where a debtor received goods, by having either physical possession or constructive possession as specified in UCC § 2-705(2), within twenty days of the commencement of the bankruptcy case. Consequently, a seller may have an administrative expense claim in a drop shipment situation, so long as the debtor at some point had constructive possession of the goods. If the goods arrived at the port in England and were attorned to the Debtor at a storage facility or through receipt by a customs agent, Ningbo might have an administrative expense claim if the Debtor had constructive possession of the goods, because the Debtor would have received the goods. However, if the goods passed from one common carrier to another, until ultimately reaching the third party purchaser, the goods were never received by the Debtor and Ningbo would have no right to an administrative expense claim. The difference between the two situations may seem unnecessarily technical, but it is the scheme adopted by BAPCPA.
Accordingly, if the Debtor had physical or constructive possession of any goods delivered in a drop shipment, within the meaning of UCC § 2-705(2), within twenty days of the commencement of the bankruptcy case, Ningbo may have an administrative claim under § 503(b)(9). The record in this case fails to establish, or even suggest, any physical or constructive possession by the Debtor in reference to any of the Drop Shipment transactions. Accordingly, Ningbo has no administrative claim under §503(b)(9) for any amounts due for the Drop Shipments.§502(d) Disallowance: The second issue before the Court is whether an administrative expense claim allowed under § 503(b)(9)is subject to disallowance under § 502(d). This is an issue of first impression in this circuit and courts around the country are split as to whether § 502(d) applies to administrative expenses at all. The majority view is that § 502(d) is not applicable to administrative expense claims.
The issue is whether § 502(d) can also disallow administrative expenses allowed under § 503(b). This Court determines that it cannot. The opening sentence to § 502(d) limits its scope to claims allowed under § 502.
Here, the Debtor admits that Ningbo holds an administrative claim of $23,070.95. Because § 502(d) is inapplicable to administrative expense claims, including an expense requested under § 503(b)(9), the claim shall be allowed in the amount of $23,070.95.
Ningbo has filed a request for an administrative expense claim for six invoices shipped to the Debtor and its customers. The Debtor argues that Ningbo is not entitled to an administrative expense claim because the Drop Shipments were not "received by the debtor" under § 503(b)(9) and because any administrative expense claim should be disallowed under § 502(d) since Ningbo is the holder of recoverable property. For the reasons set forth in this opinion, the Drop Shipments were not "received by the debtor" as required by § 503(b)(9), and therefore Ningbo's request for allowance of an administrative expense claim in connection with those shipments shall be disallowed. Ningbo's request for an administrative expense claim of $23,070.95, shall be allowed because it meets the requirements of § 503(b)(9) and cannot be disallowed under § 502(d).
Here, the Debtor admits that Ningbo holds an administrative claim of $23,070.95. Because § 502(d) is inapplicable to administrative expense claims, including an expense requested under § 503(b)(9), the claim shall be allowed in the amount of $23,070.95.
Ningbo has filed a request for an administrative expense claim for six invoices shipped to the Debtor and its customers. The Debtor argues that Ningbo is not entitled to an administrative expense claim because the Drop Shipments were not "received by the debtor" under § 503(b)(9) and because any administrative expense claim should be disallowed under § 502(d) since Ningbo is the holder of recoverable property. For the reasons set forth in this opinion, the Drop Shipments were not "received by the debtor" as required by § 503(b)(9), and therefore Ningbo's request for allowance of an administrative expense claim in connection with those shipments shall be disallowed. Ningbo's request for an administrative expense claim of $23,070.95, shall be allowed because it meets the requirements of § 503(b)(9) and cannot be disallowed under § 502(d).
No comments:
Post a Comment