Tuesday, December 13, 2011

Recent Decisions Regarding Bankruptcy & Foreclosure in the 1st Circuit (December 2011) Part 1 of 4

Court clarifies what costs and fees may be included in the 6-month priming lien of the condominium common charges in Massachusetts:

(In re LONGYEAR PROPERTIES, LLC) RBS CITIZENS, N.A. v. LONGYEAR AT FISHER HILL CONDOMINIUM TRUST, 2011 Bankr. LEXIS 4731 (Bankr. D. Mass. 12/1/2011)(Frank J. Bailey, Bankruptcy Judge).
MEMORANDUM OF DECISION: Plaintiff RBS Citizens, N.A., ("Citizens") holds a blanket mortgage on five condominium units owned by debtor Longyear Properties LLC.  Defendant ("the Trust") holds four liens under M.G.L. c. 183A, § 6(c) against each of the same units, each lien being for common area charges and related costs and attorney's fees; the liens were established in a series of four state court actions relating to successive six-month periods.

Though the units have been marketed for sale, only one has been sold to date; in the aggregate, they appear to be of insufficient value to pay in full both Citizens' mortgage and the Trust's liens, and priority is therefore an issue. By an earlier ruling in this adversary proceeding, and over the Trust's objection, this court rejected the Trust' so-called "rolling lien theory" and ruled instead that the Trust's liens on each unit enjoy priority over Citizens' mortgage only to the extent of a single six-month lien. The parties have agreed on the amount of the common area charges for that six-month period but disagree about the extent of attorney's fees and costs that should be part of that lien. Citizens maintains that the amount is limited to the fees and expenses incurred in the action that established the lien, which fees and expenses it quantifies at $11,159.62. While the Trust does not dispute that this sum properly quantifies the fees and expenses it incurred in the action that established the lien, the Trust contends that the lien should also include all fees and costs incurred thereafter to enforce its lien, which sum the Trust contends is $175,087.62 and continues to grow as further fees accrue.

The Court agrees with Citizens that the matter is resolved by the plain language of the statute. The second paragraph of
§ 6(c) states that the lien that a condominium association may obtain under that section enjoys priority over a mortgage "to the extent of the common expense assessments ... which would have become due in the absence of acceleration during the six months immediately preceding institution of an action to enforce the lien and to the extent of any costs and reasonable attorneys' fees incurred in the action to enforce the lien." M.G.L c. 183A, § 6(c) (emphasis added).

The emphasized language clearly and unambiguously limits the attorney's fee portion of the priority lien to those fees incurred "in the action to enforce the lien." There is no need to look beyond this language for a contrary intent in the statute; in any event, I discern no contrary intent at all, certainly none as clear as this express language. The operative phrase does not say "incurred to enforce the lien" or "incurred in an action to enforce the lien" but "incurred in the action to enforce the lien." The Court concludes that priority is limited to those fees incurred in the action that established the lien, $11,159.62, and does not extend to fees incurred later to enforce the lien or to enforce, defend, or further establish its priority. Judgment will enter accordingly. The total fees of $11,159.62 shall be apportioned equally among the five units.

District Court affirmed that the Bankruptcy Court retained jurisdiction to interpret an agreement based upon the “retention of jurisdiction” language in the confirmation order, and that a Court has the inherent jurisdiction to interpret its own order:

FIRST MARBLEHEAD CORPORATION, FIRST MARBLEHEAD EDUCATION RESOURCES, INC., and FIRST MARBLEHEAD DATA SERVICES, INC., v. THE EDUCATION RESOURCES INSTITUTE, INC.,   2011 U.S. Dist. LEXIS 141076 (D. Mass. 12/8/2011)(DOUGLAS P. WOODLOCK, District Judge).

MEMORANDUM AND ORDER:  Appellants appeal a Bankruptcy Court order interpreting an agreement. FMC argues that the Bankruptcy Court did not have subject matter jurisdiction to decide the meaning and effect of the agreement, and that even if it did, its interpretation was erroneous. Concluding that the Bankruptcy Court properly retained jurisdiction over the dispute and that its resolution on the merits was appropriate, I affirm.

Two months after initiating the bankruptcy proceeding, TERI requested an order from the Bankruptcy Court authorizing it to reject the agreements with FMC and enter into a Transition Services Agreement ("TSA"). In its motion, TERI explained that it could no longer operate under the fee structure of its various agreements for outsourcing services to FMC. In order to allow TERI to transition away from reliance on FMC, the parties negotiated the TSA, pursuant to which FMC would supply certain essential services at a reduced cost for up to four months.
Over two years later, on October 29, 2010, the Bankruptcy Court approved a Reorganization Plan for TERI to emerge from bankruptcy proceedings and continue operations.

The resolution of the question whether the Bankruptcy Court retained jurisdiction over the interpretation of the TSA requires the application of two principles - first, that a court's interpretation of its own order is afforded deference by a reviewing court, and second, that in order to retain jurisdiction over an agreement, a court's order must either incorporate the terms of the agreement or include a provision retaining jurisdiction over the approved agreement. I find that the Bankruptcy Court had subject matter jurisdiction over TERI's motion because both principles are applicable here.


BAP reverses Bankruptcy Court’s approval of a modified Chapter 13 plan that prevented the state from intercepting the debtor’s tax refunds post-confirmation for child support where the plan provided for payment in full of pre-petition obligations, because the plan did not expressly preclude the state from doing so, and it also violated the law of the case:

(IN RE MCGRAHAN) STATE OF NEW HAMPSHIRE v. MCGRAHAN, 2011 Bankr. LEXIS 4719 (1st Cir. BAP 12/7/2011)(Before Judges Feeney, Tester and Hoffman, Opinion by Hoffman).
PROCEDURAL: The State of New Hampshire Department of Health and Human Services ("DHHS" or the "State")appeals from the bankruptcy court's April 22, 2011 order granting the amended motion of the debtor to modify his confirmed chapter 13 plan pursuant to Bankruptcy Code § 1329. In the modified plan, the debtor sought to reduce the amount of DHHS's claim for unpaid child support obligations to account for certain federal income tax refunds of the debtor seized by DHHS after plan confirmation. The bankruptcy court interpreted the modified plan, which provided for full payment of DHHS's claim through  plan payments, as prohibiting DHHS from engaging in any further intercepts of the debtor's income tax refunds.   
OUTCOME:  We conclude the bankruptcy court erred as a matter of law for two reasons. First, the court erroneously ruled that because the Second Modified Plan no longer contained a permissive provision for tax refund intercepts by the State, such intercepts became implicitly prohibited, and second, the court failed to follow its own prior ruling in the December 1st Order that nothing in the Modified Plan prohibited DHHS from taking any action to pursue collection of domestic support obligations under state or federal law.  We, therefore, REVERSE the bankruptcy court's decision and REMAND for entry of an order consistent with this opinion.

In order for the Second Modified Plan to preclude DHHS from tax intercepts, the plan should have explicitly and conspicuously said so. Because the Second Modified Plan like the Modified Plan was silent as to DHHS's right to intercept the debtor's tax refunds, that silence cannot be deemed under § 1327(a) as binding the State and prohibiting it from exercising those rights.  The law of the case doctrine has two aspects. The first, called the mandate rule, "prevents relitigation in the trial court of matters that were explicitly or implicitly decided by an earlier appellate decision in the same case." Id. (citation omitted). For a bar to exist under the mandate rule, an issue must have been "'actually considered and decided by the appellate court,' or . . . be 'necessarily inferred from the disposition on appeal.'" The second aspect of the law of the case doctrine "contemplates that a legal decision made at one stage of a criminal or civil proceeding should remain the law of that case throughout the litigation, unless and until the decision is modified or overruled by a higher court." Thus, once an order is final, and the same has not been appealed, it becomes the law of the case.

Here, the second aspect applies. In the December 1st Order, the bankruptcy court denied DHHS's motion to reconsider because it found that there was nothing in the First Amended Plan that "prohibits the state from taking any action to pursue collection of domestic support obligations under state or federal law . . . ." Neither DHHS nor the debtor filed a notice of appeal or sought a stay of the December 1st Order. The December 1st Order is, therefore, a final order interpreting the Modified Plan as not prohibiting DHHS from pursuing collection. The Second Modified Plan did not change anything with respect to DHHS's tax intercepts (both plans were silent on that issue). Thus, the December 1st Order is the law of the case as to whether the Second Modified Plan expressly prohibited DHHS from intercepting tax refunds.

DISCUSSION: In his first amended chapter 13 plan (the "First Amended Plan"), Debtor listed DHHS as a creditor holding a $13,000.00 claim for unpaid child support. As required by § 1322(a)(2), the First Amended Plan provided that DHHS's claim would be "paid in full through the plan." It also included the following provision: The Internal Revenue Service [sic] is seizing Income Tax Refunds to pay Child Support Arrears. The Proof of Claim of NH DHHS Dept. of Child Services will be decreased annually to reflect the amounts seized. The bankruptcy court confirmed the First Amended Plan on January 22, 2010. Thereafter, the debtor through his counsel filed a priority proof of claim on DHHS's behalf in the amount of $13,862.39. No objection was filed, and the bankruptcy court allowed DHHS's claim.

After confirmation, DHHS intercepted two of the debtor's federal income tax refunds totaling $4,257.13, and applied the seized funds to its prepetition child support claim. DHHS did not amend its proof of claim to reflect the amounts seized. Consequently, the chapter 13 trustee continued to make plan payments to DHHS based on its allowed claim without adjusting for the amounts DHHS received from the intercepted tax refunds.

In October 2010, the debtor moved to modify the First Amended Plan in order to increase DHHS's arrearage claim from $13,000.00 (as set forth in the First Amended Plan) to $13,862.39 (the amount of DHHS's allowed claim) and to remove the above-quoted plan provision regarding DHHS's seizure of his tax refunds, stating that the provision was "overly burdensome" to him and to the court. No objections were filed and, after a hearing, the bankruptcy court granted the motion and approved the modified plan (the "Modified Plan").

DHHS moved for reconsideration of the court's order approving the debtor's motion to modify, arguing that the debtor's motion should not have been granted because the proposed modification deprived DHHS of its right to seize tax refunds, a right that was protected by
§ 362(b)(2)(F) and, as such, the modification did not comply with § 1325(a) nor was it authorized under § 1329(a). By order dated December 1, 2010 ("December 1st Order"), the bankruptcy court denied the motion to reconsider, stating that: The motion to reconsider is denied on the basis that it is moot due to the fact that there is no provision in the modified plan or the order approving modified plan that prohibits the state from taking any act[i]on to pursue collection of domestic support obligations under state or federal law pursuant to the findings set forth on the record this date.

On December 15, 2010, the debtor filed an amended motion to modify his plan (the "Amended Motion to Modify") and a proposed modified plan (the "Second Modified Plan") seeking to reduce the amount of DHHS's prepetition claim to $9,605.26 to account for the previously seized tax refunds and to add the following provision to the plan:
The Claim of NH DHHS Dept. of Child Support Services was filed in the amount of $13,862.39; however, since the inception of this Chapter 13 Bankruptcy the Creditor has intercepted the Debtor's Federal Income Tax Refunds. The total amount of seized by the Creditor is $4,257.13; therefore the Claim of NH DHHS Dept. of Child Support Services, being paid through the Debtor's Chapter 13 Plan of Reorganization, has been reduced to $9,605.26. 

In a response to the Amended Motion to Modify,  DHHS requested, among other things, that the bankruptcy court either: (1) expressly rule that the Second Modified Plan did not prohibit DHHS from exercising its right to intercept tax refunds as authorized by § 362(b)(2)(F); or (2) order the debtor to amend the Second Modified Plan to "expressly provide for the tax refund intercepts." DHHS did not object to the reduction of its claim. After a hearing, the bankruptcy court took the matter under advisement.

On April 22, 2011, the bankruptcy court entered an order granting the Amended Motion to Modify. The court concluded that while
§ 362(b)(2)(F) permitted a support creditor to intercept tax refunds before plan confirmation, once a plan that provides for full payment of the support creditor's claim is confirmed, the support creditor may no longer intercept refunds. The bankruptcy court determined that because the Second Modified Plan provided for full payment of DHHS's claim as required by § 1322(a)(2), and because nothing in §§ 1322 or 1325 requires a chapter 13 plan to include a provision permitting a support creditor to intercept tax refunds as described in § 362(b)(2)(F), DHHS was not permitted to engage in any further tax refund intercepts.

The issue is not whether the bankruptcy court erred in approving the Amended Motion to Modify. Rather, it is whether the court erred in determining that the effect of the modification was to prohibit the DHHS from engaging in further tax refund seizures. To resolve this issue requires an examination of the interplay between
§ 362(b)(2)(F) and § 1327 of the Bankruptcy Code.

The bankruptcy court concluded that although such seizures are not prohibited by the automatic stay, they nevertheless could violate a confirmed plan. In so holding, the bankruptcy court focused on the binding effect of a confirmed plan under
§ 1327(a).

As the First Circuit has explained, "confirmation of a Chapter 13 plan customarily is res judicata as to all issues that were or could have been decided during the confirmation process." Carvalho v. Federal Nat'l Mortg. Ass'n (In re Carvalho), 335 F.3d 45, 49 (1st Cir. 2003). "There must be finality to a confirmation order so that all parties may rely upon it without concern that actions that they may later take could be upset because of a later change or revocation of the order." The United States Supreme Court has emphasized that plan confirmation orders are final and binding regardless of pre-confirmation rights held by creditors. See United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010).  The binding effect of confirmation has led courts to conclude that once a plan is confirmed, a creditor's rights and interests are defined within the boundaries of the plan, and proceedings that are inconsistent with the confirmed plan are improper, even if they fall within an exception to the automatic stay. Thus, it is clear that all creditors are bound by a confirmation order and that even actions that would be permitted by an exception to the automatic stay (such as the interception of tax refunds to pay domestic support obligations as authorized by § 362(b)(2)(f)) may be prohibited under a confirmed plan.

The binding effect of a chapter 13 plan extends, however, only to those issues "which were actually litigated by the parties and any issue necessarily determined by the confirmation order." Conversely, a confirmed chapter 13 plan is not binding as to issues "not sufficiently evidenced in a plan to provide adequate protection to the creditor." Thus, for the Second Modified Plan to have the preclusive effect on DHHS's right to intercept tax refunds suggested by the bankruptcy court, it must have specifically addressed that right. It did not. Although the First Amended Plan contained a provision acknowledging that DHHS was making such seizures, the Modified Plan and the Second Modified Plan were silent as to DHHS's right to intercept. That silence cannot be interpreted as implicitly prohibiting DHHS from taking such action especially in light of the December 1st Order denying DHHS's motion to reconsider confirmation of the Modified Plan in which it stated "there is no provision in the modified plan or the order approving the modified plan that prohibits the state from taking any act[i]on to pursue collection of domestic support obligations under state or federal law."

Defendant held in contempt for failing to abide by court order resulting in his paying ½ of the plaintiff’s legal fees; “good faith” is not a defense; discussion of “technical contempt”:

(In re VITI) VITI Plaintiff v. MATTOS, 2011 Bankr. LEXIS 4689. (Bankr. D. R.I. 11/29/11)(Arthur Votolato, Bankruptcy Judge).
DECISION AND ORDER: Heard on Viti's Motion to Adjudge Frank Mattos, d/b/a Mattos & Associates, LLC ("Mattos"), in Willful Contempt for failing to comply with certain terms of this Court's May 12, 2011 Order.  Viti's Motion is GRANTED in part, and DENIED in part.
DISCUSSION: After what may conservatively be described as a mutually antagonistic landlord/tenant relationship, and after a lot of acrimonious litigation, Viti and Mattos purportedly reached a settlement agreement. The amount of distrust that has existed between these parties is seen in their insistence on immediately putting in writing and executing a handwritten agreement, rather than risk a "breakdown of the settlement discussions pending the drafting of a typewritten document." The agreement required, among other things, for the parties to dismiss and release all of their respective claims. Also, Mattos agreed to make a single payment to Viti in the amount of $25,937, and to vacate the property by April 10, 2011, leaving all fixtures in place, except for certain specific items noted in the agreement.
Finally, it was agreed that Viti would prepare and file a Joint Motion to Compromise, along with a proposed Consent Order. Notwithstanding what either Viti or Mattos thinks, it is this Court's expectation that a Consent Order constitutes the signed agreement of the parties.  Because Mattos neither appeared at the April 6 hearing nor filed an opposition, the Motion was granted upon a finding that the settlement, as represented, was fair and reasonable.

On April 10, Mattos vacated the property, but he failed to deliver any money or return the keys to the property. On April 25, 2011, a Proposed Order was submitted, and on May 12, 2011, after the expiration of the objection period, the Order was entered. Again, Mattos did nothing. On May 26, 2011, after still more posturing, Viti filed a motion to adjudge Mattos in contempt. On September 28, 2011, five days prior to the hearing on the Contempt Motion, Mattos delivered a check to Viti in the amount of $25,937, erroneously assuming that this litigation would thereby be ended. The hearing on the contempt motion went forward as scheduled.

Although the parties have raised questions of jurisdiction and the Court's power to enforce its own Orders, these are clearly meritless red herrings, and just another excuse for these people to continue litigating. The only issue before the Court at this time is whether Mattos was in contempt in failing or refusing to comply with the terms of the agreement incorporated in the May 12, 2011 Order, specifically, his failure to pay Viti $25,937, and holding onto the keys after he vacated the property. After all of the pretrial bombast and cross-accusations, the hearing of this matter was a huge anticlimax.

Without offering evidence on the point, Viti urges this Court to rule that Mattos's actions were willful. Perhaps as a surprise to both Mattos and Viti, because "the purpose of civil contempt proceedings is remedial, the defendant's intent in committing the contempt is not material." It is sufficient that Mattos failed to comply with the terms of the settlement agreement as incorporated in the May 12, 2011 Order.

Completely avoiding the point that he needed to address, Mattos argues that he did not act in bad faith and that his withholding of the payment was solely intended to be used as leverage to resolve all claims and issues between the parties. Regardless of the dubious veracity of that assertion, it is irrelevant, as good faith is not a defense to a claim of civil contempt.  Based on this record, I find that Mattos's failure to comply with the terms of this Court's May 12, 2011 Order approving the settlement was intentional, and Mattos was therefore in contempt.

However, in light of the entire record in these proceedings, it would be a stretch to find that Mattos's conduct was unilaterally unreasonable. Put another way, it is clear that neither party was averse to antagonizing the other, and that neither was interested in engaging in a sensible resolution of their differences.  Had Mattos not tendered payment of his obligation in full prior to the October 3, 2011 hearing, he would have been adjudged in contempt, ordered to immediately pay the $25,937, and would likely have faced monetary sanctions and other inconveniences. However, by tendering payment, albeit at the eleventh hour, Mattos essentially purged himself of a more serious offense, and remained in technical contempt, only.  On the other side of this ineptly handled litigation, Viti's counsel unblushingly urges the Court to find Mattos's actions so egregious as to merit sanctions amounting to treble damages.   The Court is mindful that Mattos's delaying tactics resulted in additional legal fees, as Viti repeatedly made efforts to collect his money. Based upon all of the foregoing, I find Mattos to be in technical contempt and order him to pay one-half of the legal fees incurred by Viti in his collection efforts. After examining his itemized bill, the Court sets $2,500 as a reasonable estimate, Mattos is ordered to pay said amount to Viti within five days, and he is directed to turn over all remaining keys to the property, simultaneously.

Chapter 13 plan was fully paid and debtor received discharge so any proceeds that result from pending adversary proceeding against lender belong to the debtor and not to be administered to creditors; pending adversary proceeding related to damages to be determined for lender’s continued rescheduling of a foreclosure sale as a violation of the automatic stay:

In re LYNN-WEAVER, 2011 Bankr. LEXIS 4718 (Bankr. D. Mass. 11/28/2011)(Frank J. Bailey, Bankruptcy Judge).
MEMORANDUM OF DECISION:  Chapter 13 Debtor, who has completed payments on her confirmed chapter 13 plan and received a discharge, contends that her obligations to fund payments to creditors through the chapter 13 trustee are at an end. The trustee disagrees, arguing that if the debtor prevails on her pending adversary complaint against her mortgagee for damages for violation of the automatic stay, she will be obligated to turn the proceeds over to the trustee for distribution to creditors. For the reasons set forth below, the court holds that where payments on the plan have been completed, modification of the plan is no longer possible, and therefore, even if the proceeds would be assets of the estate, there is no mechanism by which the trustee could reach the proceeds for distribution to creditors.

The Debtor filed her bankruptcy petition to avert the then-pending foreclosure of a mortgage on her home. Early in the case and despite the automatic stay, the foreclosing mortgagee, on more than one occasion and without relief from the automatic stay, rescheduled the foreclosure sale from one date to another. The Debtor believed these actions to constitute violations of the automatic stay. Accordingly, on September 20, 2006, the Debtor commenced an adversary proceeding against the mortgagee, its counsel, and its auctioneer (collectively, "the Mortgagee") for compensatory and punitive damages under
11 U.S.C. § 362(k) ("the Adversary Proceeding"). On a motion for partial summary judgment filed in the Adversary Proceeding, the court has ruled that the actions in question were violations of the automatic stay. The Mortgagee twice sought interlocutory appellate review of the decision on summary judgment, but leave to appeal on an interlocutory basis was denied. The adversary proceeding remains pending; a trial will be necessary to quantify damages. The judgment will almost certainly be the subject of an appeal.
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Trustee’s objection to exemption was sustained:

IN RE : PADILLA, 2011 Bankr. LEXIS 4662 (Bankr. D.P.R. 11/28/2011)(Enrique S. Lamoutte, Bankruptcy Judge).
OPINION AND ORDER:  This case is before this court upon the Trustee's objection to Debtors' claim for exemption under 11 U.S.C. § 522(d)(5)and the oppositions filed by Debtors (Docket No. 20 & 31). Debtors in this case have each claimed an exemption under Section 522(d)(5) over the same real property that is owned separately by co-debtor Cashion. Co-debtor Padilla claims the exemption alleging that he is entitled to a credit for the improvements he has made to the same real property throughout their marriage. The Trustee sustains that Debtor Padilla is not entitled to the claimed exemption over the alleged credit for the following reasons: (1) his alleged credit does not constitute an "interest" for which the exemption can be claimed under Section 522(d)(5); (2) his alleged credit does not constitute an "interest" over his spouse's real property; (3) the conjugal partnership has not been extinguished and hence, the credit is inexistent and thereby premature; and (4) the alleged improvement expenses are questionable and debatable. For the reasons stated herein, the Trustee's objection to said exemption is granted.

Pursuant to
11 U.S.C. § 522(m), exemptions in bankruptcy cases apply separately with respect to each debtor in a joint case, subject to the limitations established in Section 522(b).  Section 522(d)(5) provides as follows:  The following property may be exempted under subsection (b)(2) of this section: (5) The debtor's aggregate interest in any property, not to exceed in value $1,150 plus up to $10,825 of any unused amount of the exemption provided under paragraph (1) of this subsection. 11 U.S.C. § 522(d)(5).

In other words, under Section 522(d)(5), a debtor is allowed a general exemption of $1,150--sometimes known as the "wild card exemption"-- plus up to $10,825 of the unused portion of the homestead exemption. 
"[A] debtor must have a an ownership interest in property before an exemption may be claimed."  Property interests are created and defined by state law.  What is an "interest" in real property upon which an exemption can be claimed under Puerto Rico law.

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