Thursday, October 6, 2011

Recent decisions on bankruptcy matters within the First Circuit

Professionals should promptly file their application for retention in a chapter 11 case:

In re EVEREST CROSSING, LLC, 2011 Bankr. LEXIS 3561 (Bankr. D. Mass. 9/16/11)(Frank J. Bailey, Bankruptcy Judge).
PROCEDURAL:  A law firm filed an amended application for compensation for its services as counsel to the Chapter 11 debtor in possession. The debtor and its sole shareholder opposed the application on numerous grounds, including failures of disclosure and misrepresentations, and asked for disallowance of half the compensation requested and denial of a premium.
OVERVIEW:  Notwithstanding the law firm’s representation to the contrary, prepetition fees were included in the amount sought. Fees for those services could not be allowed as an administrative expense. A calendaring error that resulted in failure to file the application to employ within the 14 day grace period afforded by the local rule was not an extraordinary circumstance that justified granting the application with retroactive effect. The law firm was not contractually bound to accept payment other than as required by
11 U.S.C.S. § 1129(a)(9)(A), as there was no written agreement for different treatment. Undisclosed connections between the firm and the debtor and its shareholder did not disqualify the firm from employment. However, even though the nondisclosure was not accompanied by a disqualifying conflict, the court noted the pattern and extent of nondisclosures and misrepresentations in the application to employ and supporting verified statements. Thus the court, notwithstanding § 1129(a)(9)(A), in addition to limiting the firm’s claim, effectively subordinated the allowed claim to other administrative and unsecured claims by granting the debtor leave to defer payment of the sum.
OUTCOME: The court entered an order allowing compensation and reimbursement of expenses in a reduced amount, crediting against this amount a retainer paid by the debtor, denying the balance of the compensation requested, and permitting payment of the balance of the allowed fee over time.

Summary judgment denied in recorded lien dispute:

IN RE: QUINONES, 2011 Bankr. LEXIS 3425 (Bankr. D.P. R. 9/2/11)(Brian K. Tester, Bankruptcy Judge).
PROCEDURAL:  Chapter 13 debtor object to the claim filed by a creditor bank, alleging that the creditor did not have a valid and perfected lien over her property, and she sought summary judgment.
OVERVIEW:  Debtor argued that because her property interest was not properly recorded, the mortgage could not be properly recorded over an inexistent record and therefore, the creditor’s claim could not be secured.  Creditor argued that it had a right to perfect per the exception in 11 U.S.C. Section 362(b)(3).  It was undisputed that the certification presented by the debtor contained errors and was presented in the wrong section of the property registry; hence, the registrar was impeded from recording the property under the debtor’s name under the laws of Puerto Rico or subsequently issue a mortgage over the unregistered property under the law.  Under the laws of Puerto Rico, the mortgage was ineffective, making the exception in section 362(b)(3) inapplicable.  The creditor also argued the doctrine of unclean hands, and the court concluded that the application of this doctrine required a factual determination by a preponderance of evidence to establish the debtor’s knowledge, intent, and willfulness upon her actions and the creditor’s diligence in the perfection of the mortgage. These facts appeared to be material and in dispute.
OUTCOME:  SJ denied.

No sanctions against creditor as motion was not frivolous:

IN RE: RIVERA, 2011 Bankr. LEXIS 3505 (Bankr. D.P.R. 9/12/11)(Enrique S. Lamoutte, Bankruptcy Judge)
OVERVIEW: This case was before the court upon the Chapter 13 debtor's motion for sanctions, attorney's fees, and costs per Rule 9011 and 11 U.S.C. Section 105(a) against Intech.  Debtor alleges that Intech had no chance of success in motions filed before the court, advanced no reasonable argument for its position, the arguments were meritless, the arguments were aimed at misleading the court, and the arguments were presented for an improper purpose. Intech opposes this alleging that its arguments were presented in good faith, not for the purpose of delaying litigation, and based on the doctrine of judicial estoppel as the debtor had failed to include all prepetition causes of action, particularly the one against Intech.
OUTCOME: Debtor's motion is hereby denied.

Chapter 13 confirmation denied where proposed plan not funded by DMI, and debtors failed to disclose post-petition cashing in retirement funds to pay off student loans; debtors could not deduct repayment of retirement loans cashed in to repay student loans; Court disfavored debtor’s continued business essentially having creditors subsidize his losses; Court examined good faith and totality of the circumstances:

In re: Culcasi, 2011 Bankr. LEXIS 3336 (Bankr. D.N.H. 9/7/11)(upub.)(J. Michael Deasy, Bankruptcy Judge).
PROCEDURAL POSTURE: A Chapter 13 trustee objected to the confirmation of a plan, asserting that the debtors did not apply all of their projected disposable income contrary to 11 U.S.C.S. § 1325(b)(1)(B), that they sought to deduct impermissible post-petition loan payments to a retirement plan used to repay student loans, and that they could not rebut the presumption created by the Means Test analysis in 11 U.S.C.S. § 707(b)(2).
OVERVIEW: After the filing of the chapter 13 petition and without court approval, the debtors borrowed money from one debtor’s 401(k) retirement plan to pay off a student loan debt, thereby incurring an obligation to repay the 401(k) loan. Through this action, the debtors were proposing to use post-petition income, which was property of the estate, to service an unapproved loan that paid a prepetition claim outside of the Chapter 13 plan. The court concluded that this would result in unfair discrimination under 11 U.S.C.S. § 1322(b)(1) and thus added back the deduction for the loan repayment. The court also added back the monthly loss incurred as a result of the debtor’s business because the debtors did not project any change in the business income. Because the debtors did not meet their burden in rebutting the Means test, the plan did not meet the “best efforts” test of § 1325(b)(1)(B). The court concluded that the plan was filed in good faith. The debtors did not unfairly manipulate the Bankruptcy Code because they disclosed the details of the retirement plan loan.
OUTCOME: The court denied confirmation of the plan.

Court’s authority to impose fees and sanctions reviewed, and then imposed:

(IN RE: VAZQUEZ) BANCO BILBAO VIZCAYA ARGENTARIA PUERTO RICO v.VAZQUEZ,  2011 Bankr. LEXIS 3426 (Bankr. D.P.R. 8/31/11)(Brian K. Tester, Bankruptcy Judge).
OVERVIEW: Plaintiff filed a complaint to object a discharge under 727(a)(a) and (7). On January 4, 2011 during the discovery process, Defendant filed a motion for the dismissal of this adversary procedure and for the imposition of attorney's fees and costs upon the Plaintiff. In the motion, Defendant alleged that Plaintiff failed to state a claim upon which relief may be granted. Defendant argued that this was a frivolous complaint since neither of the allegations made by Plaintiff, as to the property or transfers in questions or to the time it happened, were based on property of this estate or the debtor.  On January 12, 2011, the Court allowed Plaintiff thirty (30) days to reply to Defendant's motion to dismiss. Although Plaintiff was granted an extension of five (5) days to reply to Defendant's motion to dismiss, Plaintiff never replied. Therefore, on March 7, 2011, the Court granted Defendant's motion to dismiss, and Defendant's attorney was ordered to file a motion within twenty (20) days setting forth his fees and costs.  On March 24, 2011, in compliance with the Court's order, Defendant's attorney filed a motion, wherein he described the alleged reasonable and necessary fees and costs incurred in the defense, which amounted to $7,291.38.  On April 5, 2011, Plaintiff, as requested, was granted an extension until April 25, 2011 to file a reply to Defendant's motion for attorney's fees and costs. Plaintiff, on the same day said reply was due, requested an additional extension of time and on April 26, 2011, filed its reply opposing Defendant's attorney fees and costs. In the opposition to the imposition of fees and cost, Plaintiff set forth, among other things, the arguments in opposition to the motion to dismiss, even though the motion had already been granted previously.

On May 11, 2011 and May 13, 2011 respectively, Defendant was granted its motion for the Leave to File Reply to Plaintiff's opposition to fees and costs and subsequently its urgent request for additional time to reply. On June 15, 2011, Defendant replied to Plaintiff's opposition to fees and costs, stating the particular facts in this adversary proceeding and the legal authority which would allow this Court to impose the fees and costs requested. On July 1, 2011, Plaintiff was denied an extension of time to sur-reply and Defendant's motion for fees and costs was granted. Upon the issuance of this Court's order, Plaintiff filed a motion under Fed. R. Bankr. P. 7052 to obtain findings of fact and conclusions of law. The Court’s opinion followed.

Fed. R. Bankr. P. 9011provides for the award of attorney's fees, and as sanctions for aggravated conduct such as willful disobedience to a court order, bad faith or oppressive behavior.  11 U.S.C. Section 105(a), states as follows:
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. (Emphasis added).
Case law interpreting the courts' inherent powers establishes that a federal court [...] possesses the inherent power to regulate litigants' behavior and to sanction a litigant for bad-faith conduct. A court may invoke its inherent power in conjunction with, or instead of, other sanctioning provisions such as Rule 9011. Courts have the inherent authority to impose sanctions upon [litigants] who [are] found to have acted in bad faith, vexatiously, wantonly or for oppressive reasons.

In addition, 28 U.S. C. Section 1927 prescribes that:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct. (Emphasis added).
OUTCOME: Pursuant to the Court's equitable powers, an award of attorney's fees as a sanction is justified. In the above captioned proceeding, Plaintiff never replied to Defendant's motion to dismiss, (even after the Court granted an extension to do so). Therefore, the adversary was dismissed. Relying upon its inherent authority to impose sanctions and in the exercise of its discretion, this court finds that the proper sanction that should be imposed as the minimum necessary to deter future litigation abuse is the reimbursement of the Defendants' reasonable legal expenses generated in defending this groundless action. The imposition of sanctions in the amount of the Defendants' reasonable attorney's fees is necessary to deter future unnecessary litigation and to educate the Plaintiff and her attorney.

Rescission and fees not found against creditor:

(In re MAY) MAY v. SUNTRUST MORTGAGE, INC., 2011 Bankr. LEXIS 3531 (Bankr. D. Mass. 9/14/11)(Joan N. Feeney, Bankruptcy Judge).
PROCEDURAL POSTURE: Plaintiff debtors brought an adversary complaint against defendant creditor, the assignee of their mortgagee, seeking rescission, recoupment, attorney's fees, and costs for violations of the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), Mass. Gen. Laws ch. 140D, § 1 et seq. Creditor filed a limited motion for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c).
OVERVIEW: Debtors alleged that their original mortgagee failed to deliver to each debtor at the closing a sufficient number of copies of the notice of the right to rescind, and that the finance charge disclosed under the loan transaction was understated by more than $35 and violated MCCCDA. Creditor argued correctly that a failure by the original mortgagee to deliver the requisite number of copies of the notice could not subject the creditor, as an assignee, to costs or fees, because such a violation of MCCCDA was not apparent on the face of the disclosure statement. The court noted that debtors' claims for attorney's fees and costs against were based not on the content of the notices, but rather their non-delivery. The running of the four year limitations period of Mass. Gen. Laws ch. 140D, § 10(f) and (i)(2), precluded reliance on the $35 variance to support a claim for rescission.
OUTCOME: Creditor's motion for judgment on the pleadings was granted as to debtors' claim for attorney's fees and costs, and as to the understated finance charge claim.

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