Recent Decisions Re Bankruptcy & Foreclosure in the 1st Circuit (Nov.2011) Part 3(a) of 3

BAP upholds denial of sanctions on DSO argument:

(in re KUSEK), JED BERLINER, ESQ., Appellee, v. LISA A. KUSEK, Defendant-Appellant, 2011 Bankr. LEXIS 4364 (1^st Cir. BAP 11/22/11)(Before Judges Haines, Lamoutte, Kornreich, Opinion by Haines).

PROCEDURAL POSTURE: Appellant creditor, the ex-wife of a Chapter 13 debtor, sought review of a decision from the United States Bankruptcy Court for the District of Massachusetts, which denied her motion for sanctions against appellee, the debtor’s attorney, pursuant to Fed. R. Bankr. P. 9011. The debtor’s attorney moved for sanctions against the creditor for prosecuting a frivolous appeal pursuant to Fed. R. Bankr. P. 8020.
OVERVIEW: The creditor filed a proof of claim seeking payment of a debt that she asserted was a domestic support obligation (DSO). The debtor objected to her claim and filed an adversary proceeding to establish its true character and proper treatment. He amended his complaint to add a count sounding in breach of contract, contending that the creditor breached a covenant of their separation agreement (never to seek alimony or support) by asserting a DSO claim. The court denied the motion. The creditor then asked the court to sanction the debtor’s attorney under Fed. R. Bankr. P. 9011, contending that the proposed amendment was frivolous. The court denied her motion and entered judgment for the debtor in the underlying proceeding. The judge did not abuse his discretion in concluding that the debtor’s attempt to amend his complaint, although ill-fated, was within the bounds of reason, decency, and competence. Nor was the creditor’s appeal patently meritless, as it focused on the court’s failure to set out findings and conclusions regarding its denial of her sanctions motion, which in some cases would have been a shortcoming that would lead to, if nothing else, remand.
OUTCOME: The bankruptcy court's denial of the creditor's Fed. R. Bankr. P. 9011 motion was affirmed. The debtor's attorney's motion for sanctions on appeal was denied.  We conclude that the bankruptcy court acted within its discretion in denying Lisa's motion for sanctions. We do not accept her protest that the court's refusal to hear the motion and to enter findings makes remand essential. We also conclude that Attorney Berliner's motion for sanctions is denied.

DSO (Domestic support Obligation i.e. alimony, maintenance, support) is entitled to first priority in the hierarchy of unsecured claims. § 507(a)(1). DSO claims must be provided for without discount in a Chapter 13 plan, § 1322(a), and the plan will not be confirmed unless the debtor demonstrates that he or she is current on all DSO payments that have come due since bankruptcy was filed. In addition, a debtor will not receive a Chapter 13 discharge - of any debts - without certification that all DSO obligations, those treated in the plan as well as those that have come due since confirmation, have been fully paid. § 1328(a). Moreover, the Chapter 13 discharge does not relieve the debtor of liability for a DSO. §§ 523(a)(5), 1328(a)(2).  Thomas asserted that his obligation to Lisa was not a DSO. Thus, he objected to her claim and filed an adversary proceeding to establish its true character and proper treatment. The issues were joined and the parties set about working their wills in a highly contentious way. Thomas countered Lisa's answer with a motion for judgment on the pleadings. Lisa successfully parried his effort. Her riposte was an unsuccessful motion for sanctions against Attorney Berliner. Discovery ensued.  About six months into the litigation, Thomas sought leave to amend his complaint to add a count sounding in breach of contract under Massachusetts law. He contended that, by asserting a DSO claim (a claim characterized as "in the nature of alimony or support"), Lisa had breached a covenant of their separation agreement (i.e., never to seek alimony or support). Thomas asserted that covenant remained independently binding, notwithstanding entry of a final divorce judgment. Accordingly, he sought to plead that, to the extent Lisa might succeed in pressing a DSO claim, he was entitled to offset with damages for contractual breach. The notion was a non-starter. In the face of Lisa's opposition, and after a hearing on the record, the court denied the motion.  Lisa's opposition to the motion stated myriad grounds, ranging from estoppel and nonjusticiability to the assertion that Thomas's proposed contractually-based counterclaim was, in the bankruptcy context, without support in the law. The court agreed with the last point, finding the proposed count "not legally cognizable."

Subsequently, Lisa (again) asked the court to sanction Attorney Berliner under Rule 9011, contending that the proposed amendment was "frivolous" because it was "futile" and "not ripe for review;" that it was "not warranted by existing law or a nonfrivolous argument" for a departure from existing law; and that it had been interposed to cause "unnecessary delay" and "needless expense." She asked that sanctions, including attorney's fees she incurred in opposing Thomas's motion to amend and in prosecuting the Rule 9011 motion, be awarded to her. Without a hearing, and without articulating findings  or conclusions, the court denied Lisa's motion.  Shortly thereafter, the dispute went to trial. Providing oral findings of fact and conclusions of law, the court entered judgment for Thomas. Lisa timely appealed. She does not impugn the final judgment, but takes issue only with the court's denial of her second sanctions motion. And now Attorney Berliner, apparently learning by example, insists that we sanction Lisa for prosecuting a frivolous appeal.

Jurisdiction:  We are empowered to hear appeals from "final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1)], or with leave of court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)]. Absent exceptional circumstances, an order denying sanctions becomes appealable only upon entry of a final judgment in the underlying proceeding. Lisa timely filed her appeal upon entry of the adversary proceeding final judgment. Thus, we have jurisdiction to hear it.
Trial court decisions awarding or denying sanctions are reviewed for abuse of discretion. Abuse of discretion exists when a relevant factor deserving of significant weight is overlooked, or when an improper factor is accorded significant weight, or when the court considers the appropriate mix of factors, but commits a palpable error of judgment in calibrating the decisional scales.

Although Lisa asserts that sanctions were in order (and articulates her arguments in favor of their imposition), she maintains that, at minimum, we must remand the matter. She argues that the bankruptcy judge's failure to articulate the basis for denying her motion deprives us of the opportunity to effect meaningful review of his decision. Attorney Berliner replies that the record is sufficient and, on the merits, the ruling must be sustained. In the end, we side with Attorney Berliner. The bankruptcy courts have discretion to impose sanctions against attorneys or pro se parties who violate [Rule] 9011(b).  Subjective good faith is not the issue; generally, Rule 9011 demands that counsel's actions comport with an objective standard of lawyerly performance.  Reflection reveals that appellate review of denials of such motions calls for somewhat more restraint than review of positive actions imposing sanctions and shifting.  The First Circuit has repeatedly rejected the notion that a judge is duty-bound to make specific findings when it denies a request for sanctions. We must not lose sight of the fact that [Rule 9011] was intended as a tool to hold lawyers in check and to assist judges in overseeing the proper functioning of the judicial process. This tool, and the sanctions which can be imposed under its authority, are an adjunct to the business of litigation, not the main event. We will not invite full-blown satellite litigation over such issues, nor will we require trial courts to conjure up a welter of paperwork every time a sanctions motion is filed. We have never required more than that the court's rationale be apparent from the face of the record and supported by the facts. The record is sufficient to review the decision of the court below. No second guessing will be required of us.
CONCLUSION: “Enough is enough.” The bankruptcy court's denial of Lisa's Rule 9011 motion is AFFIRMED. Attorney Berliner's motion for sanctions on appeal is DENIED.

Bankruptcy Court will not enter money judgment in discharge proceedings, nor authorize writ of execution:

(In re: ANTONELLI) DeANGELIS v. ANTONELLI,  2011 Bankr. LEXIS 4414 (Bankr. D.R.I. 11/10/11).
SUMMARY: Heard on Roseanne DeAngelis's ("Plaintiff") Application for the Issuance of a Writ of Execution pursuant to a judgment entered on May 21, 2010 against Christopher Antonelli, III ("Defendant"). At issue is whether this Court should adopt an "expansive" view, or a "limited jurisdiction" approach regarding its power to enforce a judgment based on a claim that has been held to be nondischargeable. Given the undisputed facts, the applicable law, and for the reasons discussed below, Plaintiff's Application for the Issuance of a Writ of Execution is DENIED.
DISCUSSION:  Plaintiff urges the Court to rule that it has the power to determine money damages in dischargeability proceedings. "[A]llowing the bankruptcy judge to settle both the dischargeability of the debt and the amount of the money judgment accords with the rule generally followed by courts of equity that having jurisdiction of the parties to controversies brought before them, they will decide all matters in dispute and decree complete relief." While the court's language in Hallahan certainly was a reasonable statement in 1935 and 1991, recent Supreme Court treatment of this subject has cast a much dimmer light on the power of non-Article III courts to render money judgments in dischargeability litigation.  See Stern v. Marshall, 131 S. Ct. 2594, 2615 (2011).  The relevant case in the First Circuit is In re Cambio, 353 B.R. 30, 34 (1^st Cir. B.A.P. 2004), , where the Bankruptcy Appellate Panel ("BAP") adopted the "limited jurisdiction" approach, holding that Bankruptcy jurisdiction is confined to determining dischargeability. Thereafter, once a claim is held to be nondischargeable, the bankruptcy court may not then issue a writ of execution, and the state court is the proper forum for the Plaintiff to obtain the relief she is seeking here. The panel in Cambio considered both the "limited" and "expansive" approaches in detail, and concluded that where "the only effect of the money judgment against this debtor would be to enhance [the Plaintiff's] future ability to collect the debt from [the Defendant's] post-bankruptcy income and assets, with no effect at all on property of the bankruptcy estate or creditors' claims against the estate . . . the bankruptcy court's role should be limited by applying the limited jurisdiction approach." Cambio, 353 B.R. at 34.

Here, Plaintiff's claim is based on a decision of the Rhode Island Commission on Human Rights, which resolved a two party dispute that is clearly unrelated to the bankruptcy estate. While it is, of course, a function of this Court to hear and determine § 523 and § 727 denial of discharge issues, that jurisdiction does not include the power to issue a Writ of Execution in a dispute where the outcome will have no effect on the bankruptcy estate. Accordingly, Plaintiff's Application for the Issuance of a Writ of Execution is DENIED. Of course, she is free, and encouraged to pursue her collection rights in the Rhode Island state courts.

Circumstances where a confirmed Chapter 11 plan may include release of liability:

In re: QUINCY MEDICAL CENTER, INC., QUINCY ED PHYSICIANS, INC., QUINCY PHYSICIAN CORPORATION, Debtors, 2011 Bankr. LEXIS 4405 (Bankr. D. Mass. 11/16/11).

PROCEDURAL POSTURE: Chapter 11 debtors sought confirmation of their joint plan of liquidation, which contained provisions for certain releases, exculpation, and injunctions.
OVERVIEW: The Court agreed with the majority position that in the appropriate circumstances a Chapter 11 plan might provide for certain releases, exculpation and injunctions under 11 U.S.C.S. § 1123(b)(3). The proposed release of the indenture trustee and the bond owners was justified because they each made material concessions and contributed significant consideration to the debtors’ plan. However, there did not appear to be any justification for the release of the debtors' affiliates, subsidiaries, officers, directors, and certain others. Only consensual releases were permissible. Because the debtors failed to comply with the notification requirements of Fed. R. Bankr. P. 2002(b)(2) for the hearing on plan confirmation, the injunction provisions of the plan to the extent they went beyond the discharge injunction in 11 U.S.C.S. § 524(a)(2) were not approved. The plan’s exemption from transfer taxes under 11 U.S.C.S. § 1146(a) was limited to post-confirmation sales.
OUTCOME: The court found the debtors' plan to be confirmable if the releases did not include the creditors' committee or officers, directors; if the releases were limited to those who accepted the plan; if the injunction provisions were removed or notification compliance occurred; and if the exemption from transfer taxes was limited to post-confirmation transfers.

DISCUSSION:

A number of courts have adopted the five-factor analysis articulated in In re Master Mortgage Invest. Fund, Inc., 168 B.R. 930, 937-38 (Bankr. W.D. Mo. 1994), and consider whether:

1. There is an identity of interest, usually an indemnity relationship, between the debtor and the third party being released such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate.
2. The non-debtor being released has contributed substantial assets to the reorganization.
3. The proposed injunction is essential to the reorganization and without it, there is little likelihood of success.
4. A substantial majority of the creditors agree to the injunction, specifically, the impacted classes have "overwhelmingly" voted to accept the proposed plan treatment.
5. The plan provides a mechanism for the payment of all, or substantially all, of the claims of the class or classes affected by the injunction.

"These factors are neither exclusive nor conjunctive requirements, but simply provide guidance in the Court's determination of fairness."

While the Court of Appeals for the First Circuit has thus far remained above the fray (see Monarch Life Inc. Co. v. Ropes & Gray, 65 F.3d 973, 983-84 (1st Cir. 1995)), the issue has been addressed by lower courts in this district. Judge Hillman in In re Mahoney Hawkes, LLP, 289 B.R. 285, 300 (Bankr. D. Mass. 2002),  and In re M.J.H. Leasing, Inc., 328 B.R. 363, 369-71 (Bankr. D. Mass. 2005), acknowledged the court's authority to confirm plans containing releases and injunctions, but after applying the Master Mortgage factors in each case declined to do so. Judge Queenan in In re Boston Harbor Marina Co., 157 B.R. 726 (Bankr. D. Mass. 1993), recognized the authority of the court to approve plan releases and injunctions in certain circumstances but he too found those circumstances absent from the case before him. In In re Salem Suede, Inc., 219 B.R. 922 (Bankr. D. Mass. 1998), Judge Feeney denied confirmation of a plan because among other things, it proposed to enjoin actions against a non-debtor third party.
I agree with the majority position that in the appropriate circumstances a Chapter 11 plan may provide for the kinds of releases, exculpation and injunctions contained in the debtors' joint plan in these cases.

With respect to a debtor's releases, there is no reason why a debtor in its reasonable business judgment should not be permitted, as part of its own plan, to propose to release whomever it chooses. Bankruptcy Code § 1123(b)(3) contemplates such plan provisions which are analogous to Federal Rule of Bankruptcy Procedure 9019 compromises and settlements. To the extent, however, that a proposed release is without adequate consideration or otherwise improvident, the plan confirmation process affords the court or interested parties the opportunity to interpose objections.  Here, the debtors and their successors, including the liquidation trustee, propose in section C of article X of their plan to release a group of "Released Parties". The United States trustee has objected, arguing that the plan's release terms do not meet the Master Mortgage test. I find that the indenture trustee and the bondowners have each made material concessions and contributed significant consideration to the debtors' plan. Thus the debtors' proposed release of these parties is justified. There does not, however, appear to be any justification for the release of the debtors' affiliates, subsidiaries, officers, directors and others identified in clause (a) or of the creditors' committee and its affiliates and representatives. The U.S. trustee objected to the exculpation provision to the extent it covered either pre-petition or post-effective date activities and the debtors have proposed a modification of the relevant plan provision which satisfies the U.S. trustee's concerns.

Third party releases pose the greatest challenge to a bankruptcy court in evaluating plan confirmation as they purport to effect releases by third parties with respect to claims against not only the debtor but also the other active participants in the bankruptcy case. Here the debtors propose to bind all creditors and holders of interests in the debtors who voted to accept the plan or who are "deemed to accept the plan" to a release of the Released Parties from a broad spectrum of claims (section E of article X). The U.S. trustee objected to the plan's third party release provision in its entirety as impermissible under applicable law.  I subscribe to the view expressed by, among others, Judge Gerber in In re Adelphia Comm. Corp., 368 B.R. 140, 268 (Bankr. S.D.N.Y. 2007), and Judge Walrath in In re Washington Mutual, 442 B.R. at 351-52, that only consensual releases are permissible. Each ballot sent to those who were entitled to vote to accept or reject the debtors' plan contained the following legend in boldface capitalized text:  A VOTE TO ACCEPT THE PLAN CONSTITUTES AN ACCEPTANCE AND ASSENT TO THE RELEASES SET FORTH IN SECTION X.E OF THE PLAN.  Thus with respect to creditors and others who actually voted in favor of the plan by signing and returning a ballot, section E of article X will be approved. But as to creditors who are deemed to have accepted the plan, which I take to mean creditors who did not return a ballot but who are members of an accepting class, actual consent is lacking and binding these creditors to a release would be inappropriate.

In keeping with the objective of debtors to hermetically insulate themselves from exposure to creditor claims, many plans provide for permanent injunctions to issue upon plan confirmation. To the extent a proposed injunction is limited to enforcement of claims to be released under acceptable plan release provisions, the injunction is really nothing more than an enforcement device analogous to Bankruptcy Code § 524(a)(2) which enjoins enforcement of discharged claims.

Section F of article X of the debtors' plan is consistent with the use of injunctions to enforce releases and thus is not in and of itself objectionable. Unfortunately, the debtors have failed to comply with Rule 2002(c)(3) of the Federal Rules of Bankruptcy Procedure which requires that:

HN6 If a plan provides for an injunction against conduct not otherwise enjoined under the Code, the notice required under Rule 2002(b)(2) shall: (A) include in conspicuous language (bold, italic, or underlined text) a statement that the plan proposes an injunction; (B) describe briefly the nature of the injunction; and (C) identify the entities that would be subject to the injunction.

The debtors' notice of hearing on plan confirmation dated October 7, 2011 failed to contain the required language. For this reason the injunction provisions of the debtors' plan to the extent that they go beyond the discharge injunction in §524(a)(2) cannot be approved. See In re Ground Round, No. 04-11235, 2007 Bankr. LEXIS 503, 2007 WL 496656, at *3 (Bankr. D. Mass. Feb. 13, 2007).

Unrelated to the issue of releases, exculpation and injunctions is the provision of the plan providing for exemption from transfer taxes (article V, section J). In light of the United States Supreme Court's ruling in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 128 S. Ct. 2326, 171 L. Ed. 2d 203 (2008),  [*12] this provision is overbroad as it appears to apply to the pre-confirmation sale of the debtors' assets to Quincy Medical Center, A Steward Family Hospital, Inc. pursuant to Bankruptcy Code § 363. HN7 The Supreme Court has interpreted Bankruptcy Code § 1146(a) to apply only to post-confirmation sales.

To summarize, the debtors' joint plan will be confirmable if the debtors' releases do not include the creditors' committee or officers, directors and others described in clauses (a) and (d) of the definition of Released Parties under the plan; if the plan's third party releases are limited to those who actually submitted ballots accepting the plan; if the injunction provision of the plan is removed or appropriate compliance with Rule 2002(c)(3) occurs; and if the plan's exemption from transfer taxes is limited to post-confirmation transfers. The debtors shall have until November 21, 2011 to submit either a proposed confirmation order modifying the plan in accordance with this memorandum or a request for other appropriate relief.

Court explains how to use business income and business expenses to arrive at disposable income for the self-employed debtor in Chapter 13 using a “mechanical test”;

and,  thus overruling the US Trustee’s objection:

IN RE: ROMAN, 2011 Bankr. LEXIS 4483, (Bankr. D.P.R. 11/16/11).

OPINION AND ORDER:  This proceeding is before the Court upon Debtor's Amended Chapter 13 Plan and the Chapter 13 Trustee's (the "Trustee") objection to confirmation of the debtors' chapter 13 plan and objection to amended statement of current monthly income (the "Objection"). The controversy is based on Debtor's calculation of their current monthly income. Debtor, following the format and instructions of Official Bankruptcy Form B22C ("Form B22C"), deducted business expenses from its self-employed income, which resulted in below-median income, entitling debtors to a three (3) year commitment period. For the reasons set forth below, this Court adopts the mechanical test for determining disposable income as set forth in Sections 1325(b)(1)(B) and 1325(b)(2), by reference to current monthly income determined pursuant to Section 101(10A) and Official Form B22C, and therefore denies the Trustee's Objection.
The Trustee's position is that a self-employed Chapter 13 debtor, as in this case, should not be allowed to deduct the ordinary and necessary business expenses from line 3 of the SCMI when calculating the current monthly income and the applicable commitment period, even though the official form (Form B22C) so provides.

The Trustee contests deduction of ordinary and necessary business expenses when calculating Debtor's current monthly income in Part I of Official Form B22C vis a vis allowing said deductions in "Other Expenses" category included in Part IV of Form B22 C. Form B22C comprises: (i) a report of current monthly income (Part I of Form B22C), (ii) calculation of the plan's applicable commitment period (Part II of Form B22C) and (iii) computation of means test and deductions to determine monthly disposable income for above-median income chapter 13 debtors (Parts III & IV of Form B22C).

Debtor in this case is not proposing to pay unsecured creditors' claims in full, therefore, he must commit all of his projected disposable income received during the applicable commitment period to fund the plan.

Under Section 1325(b)(2)(B), debtors engaged in business are subject to additional exclusions and deductions to arrive at the disposable income. That is, after the deduction of amounts necessary for support and maintenance of the debtor and the debtor's dependents, the debtor must also deduct from the business gross income those expenditures which are necessary for the continuation, preservation, and operation of the debtor's business. 11 U.S.C. 1325(b)(2)(B); 8 Collier on Bankruptcy ¶ 1325.11[4][c] (16th ed.).  In this sense, the Court's task is limited to determining whether expenditures are necessary for the continuation, preservation, and operation of the business. 11 U.S.C. 1325(b)(2)(B); 8 Collier on Bankruptcy, supra. Discretion must be given to the debtor, who will usually know its business far better than the Court or the Trustee. Id.

Here, the Trustee argues that Debtor should deduct the business expenses in Part IV of the Form B22C in order to determine his disposable income, and not in Part I of the Form B22C where the current monthly income is computed. The Trustee claims that the plain meaning of the statute dictates such a result.

The Court agrees that the plain meaning of the statute must govern the result. However, the Court disagrees with the Trustee's interpretation of the plain meaning of Sections 101(10A), 1325(b)(2)(B) and Form B22C.

To assist a debtor in calculating the required disposable income amount under § 1325(b)(2), the Judicial Conference of the United States prescribed Official Form B22C. Moreover, Bankruptcy Rule 9009 requires the use of Official Forms, which shall be construed to be consistent with the Bankruptcy Rules and Code. Particularly, Form B22C is intended to provide a standard methodology for evaluating a debtor's income and expenses. Pursuant to Fed. R. Bank. P. 1007(b)(6), debtors must complete Form B22C to determine its current monthly income and to calculate the disposable income amount. Using Form B22C, debtors compute their current monthly income (Part I of Form B22C) and the plan's applicable commitment period (Part II of Form B22C).

In establishing the current monthly income, Part I of Form B22C allows a debtor to deduct the ordinary and necessary business expenses from the gross receipts of the operation of its business, the difference of which is reported as business income. (Form B22C, Lines 3a to 3c). Form B22C uses net, and not gross, business income to calculate a debtor's current monthly income, which is the income a debtor could expect to receive monthly. (Form B22C, Lines 3a to 3c).

All chapter 13 debtors are required to complete Form B22C and adhere to its form.  Moreover, Form B22C provides for reporting of business expenses (Form B22C, Lines 3a to 3c), which are not listed as a specific category under "Other Necessary Expenses" (Part IV of Form B22C), but rather included for computation of debtor's current monthly income. (Part I of Form B22C).

Spouse’s income: Among other things, the additional income of a business (as of a non-debtor spouse) is completely irrelevant for the reckoning  of Debtor's plan, if that income is not made available to cover household expenses so that the debtor has more money available to make the plan payment. See In re Dugan, 2008 Bankr. LEXIS 2813, 2008 WL 3558217 (Bankr. D. Kan. Aug. 12, 2008)(in determining whether to consider income of a non-filing spouse).

The Trustee's interpretation of Form B22C would artificially inflate the current monthly income of Debtor by including as part of his income the business revenue that would in fact be consumed by business expenses, thereby forcing a longer commitment period under. 11 U.S.C. § 1325(b)(4). Debtors filed its Amended Form B22C or SCMI, subtracting business expenses on Line 3, Part I, allowing for their current monthly income to fall below the median. As such, they were not required to fill out Parts IV through VI and could file a three-year plan. Trustees have no legitimate interest in objecting to plans, or modifications thereof, where debtors propose to pay all that they can truly afford.

This Court holds that it will apply the mechanical test in determining disposable income in both Sections 1325(b)(1)(B) and 1325(b)(2) by reference to current monthly income determined pursuant to Section 101(10A) and Form B22C.