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

Court may enlarge the time set under local rule for an 11 U.S.C. Section 509(b) claim, for cause:

In re: J.J. DONOVAN AND SONS, INC., 2011 Bankr. LEXIS 5020 (Bankr. D. Mass. 12/22/11)(Henry J. Boroff, Bankruptcy Judge).

Before the Court is a "Motion For Leave to File Statement of Claim for Administrative Expense Pursuant to 11 U.S. C. SEction 503(b)(9) filed by A.L. Prime Energy Consultant, Inc. ("Prime"). This case presents an issue of first impression in this Circuit: whether a bankruptcy court has the discretion to allow the late filing of a request for payment of a claim asserting priority under Section 503(b)(9).  J.J. Donovan and Sons, Inc. (the "Debtor") owns and operates a fuel terminal. The Debtor delivers fuel and services heating equipment. Between April 11 and April 20, 2011, the Debtor ordered deliveries of fuel oil from Prime. A little over a week later, on April 29, the Debtor filed its voluntary Chapter 11 petition. The Section 341(a) meeting of creditors was originally scheduled for June 6, but was not held on that date. Prime filed the instant motion 65 days after that first date set for the meeting and 5 days after the deadline set by Local Rule 3002-1 filing Section 503(b)(9) claims. By its Motion, Prime requests the allowance of its late filed claim.  In response to Prime's Motion, Gulf Oil Limited Partnership ("Gulf") and the Chapter 11 Trustee timely filed an Opposition and Objection, respectively. At the hearing on the Motion, Gulf and the Chapter 11 Trustee contested both the characterization of Prime's claim as entitled to priority under Section 503(b)(9) as well as the Court's ability to permit the late filing of it. At the conclusion of the hearing, the Court articulated generally the two issues presented—the second conditioned upon the first: (1) whether the Section 503(b)(9)claim filing deadline set forth in Local Rule 3002-1 is subject to extension for excusable neglect; and (2) whether Prime has shown excusable neglect. Section 503(b) lists those claims eligible for administrative expense status. One such claim is: the value of any goods received by the debtor within 20 days before the date of commencement of the case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business. (503(b)(9))  While the Bankruptcy Code and the Bankruptcy Rules are silent as to when such a claim must be filed, Local Rule 3002-1 fills the void.

Bankruptcy Rule 9006 governs the computation, enlargement and reduction of time periods specified in other bankruptcy rules as well as "in the Federal Rules of Civil Procedure, in any local rule or court order, or in any statute that does not specify a method of computing time." Fed. R. Bankr. P. 9006(a)(emphasis supplied). Subsection (b) of the Rule instructs as to when and how those time periods may be enlarged.  This Court concludes that, while Local Rule 3002-1 affords the Court with the flexibility to set the deadline for the filing of Section 503(b)(9) claims, Bankruptcy Rule 9006(b) permits the Court to allow such a claim after the deadline, upon a showing of the claimant's excusable neglect.

Court personally views home to aid in value determination:

In re EDWARD J. BUCHER, 2011 Bankr. LEXIS 5060 (Bankr. D.R. I. 12/19/11)(Arthur N. Votolato, Bankruptcy Judge).

Debtor’s Motion to Modify (and reduce) the Secured Claim of Creditor RBS Citizens, N.A. ("Citizens") to the fair market value of the real property on which Citizens holds the mortgage. Bucher contends that the value of his house at 15 Seaview Court, Tiverton, Rhode Island is $175,000.  Citizens places the value of the property at $240,000.  Both experts used the comparable (or comparative) sales approach to estimate the value of the subject property. It is worth noting, and the parties agree, that in this case, similar sales are hard to find. The subject property is a 1950's Contemporary "California Modern" single family residence that apparently did not gain popularity in the Northeast, and which is unique among its neighboring homes. From the Court's standpoint, given the difficulty that the dearth of comparative sales presented for the appraisers, the ability to view the subject property turned out to be the most helpful factor in determining its fair market value, which the Court finds is $175,000.  Home was in considerable need of repair.  The longer the Court ponders the evidence, in an effort to reconcile the disparate opinions of value, the less confidence it has in what the bank's appraiser has to say, i.e., the bank's evidence in this matter ignores the visual and actual reality and the boundaries within which courts are expected to accept expert opinions, whatever they are.  Accordingly, the Court adopts $175,000 as the market value of a house.

Court determines value of creditor’s collateral and interest rate to be paid to arrive at confirmation:

In re WENTWORTH HILLS, LLC, and WENTWORTH HILLS PROPERTY OPERATOR, LLC, 2011 Bankr. LEXIS 4945 (Bankr. D. Mass. 12/16/11)(Not for Pub.)(Frank J. Bailey, Bankruptcy Judge).

OVERVIEW: The court determined the value of the realty and personalty. Both parties' appraisers ably supported their dramatically divergent positions, but the court determined that the value of the collateral was closer to the creditor’s position. The debtors’ risk factor satisfied the governing formula approach for the calculation of the interest rate under 11 U.S.C. Section 1129(b) (2)(A)(i)(II), and the plan was feasible under Section 1129(a)(11). The debtors' projections showed sufficient cash reserves to handle a one-time loss due to increased debt service, and in subsequent years, the debtors would operate at a small and slowly-growing profit after debt service. The plan was proposed in good faith under Section 1129(a)(3). The debtors tentatively but unsuccessfully explored avenues of compromise, and there was no harm to any creditor and no bad faith in the satisfaction of municipal tax liens in three years instead of four. The fact that the initial plan did not provide for an auction of the equity and did provide for the securing of a capital infusion was of no moment because Section 1129(a)(3)asked whether the plan at issue, not earlier iterations, was proposed in good faith.
OUTCOME: The court determined the value of the creditor's secured claim and overruled the objections to confirmation.

After death of Chapter 7 Debtor, Court determined which claims did or did not survive his death for the Trustee to pursue:

(IN RE: C.R. STONE CONCRETE CONTRACTORS, INC., DEBTOR)

JOSEPH BUTLER, CHAPTER 7 TRUSTEE OF THE ESTATE OF C.R. STONE CONCRETE CONTRACTORS, INC., PLAINTIFF, v. RICHARD ANDERSON, GILLIAN WELBY, JOHN MARINI, PLUMB HOUSE, INC., DALTON BUILDERS, INC., JOHN MARINI MANAGEMENT COMPANY, LENOX-NORWOOD LLC, AND THE FRAMING COMPANY, INC., 2011 Bankr. LEXIS 4970 (D. Mass. 12/19/11)(William C. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff bankruptcy trustee pursued an adversary proceeding against defendants, a principal of general contractors and others, asserting claims based on the defendants' alleged attempt to take over the business and property of the bankruptcy debtor which was a subcontractor. Upon the death of the principal, the trustee moved to substitute the executor of the principal's estate for the principal in the proceeding.

OVERVIEW: The trustee asserted claims for turnover, post-petition use of the debtor's property, fraudulent transfers, conversion, conspiracy, tortious interference with contractual and business relations, unfair and deceptive practices, violations of the automatic bankruptcy stay, equitable estoppel, and constructive trust. The executor contended that the claims did not survive the principal's death. The bankruptcy court first held that surviving claims for goods and personal property within the meaning of Mass. Gen. Laws ch. 228, § 1 included intangible assets of the debtor, and thus the trustee's claims for conversion, tortious interference with contract and business rights, and conspiracy survived the principal's death. However, the claim for unfair and deceptive practices survived only to the extent that it did not rely upon torts based on deceit, and the claims for equitable estoppel and subordination based upon fraud and misrepresentation abated upon the principal's death. Nonetheless, claims for turnover, postpetition misconduct, fraudulent transfers, and violations of the bankruptcy stay were remedial rather than penal in nature, and thus the claims survived the principal's death.

OUTCOME: The trustee's motion to substitute the executor for the principal was granted in part with regard to claims for turnover, postpetition use of the debtor's property, fraudulent transfers, conversion, conspiracy, interference with contractual and business relations, and violations of the automatic bankruptcy stay, and the motion was denied in part with regard to claims for unfair and deceptive practices, equitable estoppel, and constructive trust.

Debt determined to be nondischargeable based upon default judgment wherein plaintiff alleged debtor had stolen her property interest in a retirement account:

(IN RE: JAMES O. HALLET) REICH v. HALLET,  2011 Bankr. LEXIS 4992 (Bankr. D. Mass. 12/19/11)(William C. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff, the former wife of defendant Chapter 7 debtor, filed a adversary proceeding against defendant in which she sought a determination that a default judgment was nondischargeable under 11 U.S.C.S. § 523. The court, having denied both parties' motions for summary judgment, reconsidered its decision following plaintiff's request for a status conference.

OVERVIEW: After plaintiff filed a civil action alleging that defendant had stolen her property interest in a retirement account, a state court entered a default judgment against defendant. In its prior decision, the court had found that the default judgment, which was incorporated into a Qualified Domestic Relations Order (QDRO), satisfied the definition of larceny under § 523(a)(4). It had declined to enter summary judgment for plaintiff, however, because it had granted the parties relief from stay to return to the state court to clarify its orders. The court construed plaintiff's request for a status conference as a motion for relief from judgment under Fed. R. Civ. P. 60(b). It stated that for purposes of this adversary proceeding, it needed only to accept that defendant committed an act that satisfied the definition of larceny as that term was used in § 523(a)(4). Therefore, it was irrelevant whether a property interest had actually been transferred, because the QDRO found that one was stolen, and that was enough. The default judgment satisfied the "fully litigated" requirement of collateral estoppel. Thus, the debt was nondischargeable, and plaintiff was entitled to summary judgment.

OUTCOME: The court vacated its prior order in which it had denied plaintiff's motion for summary judgment. It entered summary judgment in favor of plaintiff and held that the debt was nondischargeable.

Prepetition, the Plaintiff filed a civil action in the Florida Circuit Court alleging that the Debtor had stolen her legally recognized property interest in the SRA Account.  The Debtor did not appear or defend against the Civil Action, and on May 9, 2003, Circuit Judge Traynor entered a Final Judgment in the amount of $98,192.45, including treble damages and attorney's fees, against the Debtor.  Further proceedings followed before Circuit Judge Alexander, resulting in him entering a QDRO incorporating the full amount of the Civil Judgment.

Discharge Challenge denied:

(In re HENRICKSEN) LaLONDE v. HENRICKSEN, 2011 Bankr. LEXIS 4943 (Bankr. D. Mass. 12/16/11)(Joan N. Feeney, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff creditor filed a "Complaint Objecting to Dischargeability of Indebtedness." She formulated two counts in her Complaint, which she captioned as follows: Willful and Malicious Injury (11 U.S.C.S. § 523(a)(6)); and Violation of Mass. Gen. Laws ch. 93A. She cited 11 U.S.C.S. § 523(a)(2)(A) in the second count. In her Complaint, plaintiff blurred the causes of action under § 523(a)(6), (a)(2)(A). Defendant debtor moved for summary judgment.

OVERVIEW: To prevail on her claims under either 11 U.S.C.S. § 523(a)(2)(A) or (a)(6), the creditor had to establish that she suffered damages of some sort that were either due to debtor's willful or malicious conduct or the result of his false representations or actual fraud. Debtor maintained that the issue of the creditor's damages was resolved by the Superior Court and collateral estoppel prevented relitigation of that issue which was a critical element of claims under either § 523(a)(2)(A) and (a)(6). For collateral estoppel to apply, the court had to conclude that the Superior Court's decision relative to the creditor's contractual damages was binding relative to her present claims. The court found that all the elements required to apply collateral estoppel were present in the instant case. Because the creditor failed to posit damages other than her attorney's fees, which were awarded pursuant to her Mass. Gen. Laws ch. 93A claim and not for any cause of action arising out of the construction contract itself, the court found that debtor established that there were no issues of material fact in dispute, Fed. R. Civ. P. 56(a).

OUTCOME: Debtor's motion for summary judgment was granted. Accordingly, the court entered judgment in favor of debtor and against plaintiff on all counts of plaintiff's Complaint.

Debtor could not avoid mortgage based on defect in property description:

(IN RE: ADAMS) WARREN E. AGIN, TRUSTEE v. JPMORGAN CHASE BANK, N.A., 2011 Bankr. LEXIS 4965 (Bankr. D. Mass. 12/16/11)(William c. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Defendant bank sought summary judgment on claims that plaintiff trustee was not entitled to avoid a mortgage granted by debtor based on an alleged defect in the mortgage's description of the property. Plaintiff had filed a complaint for a declaration that it might avoid that mortgage under 11 U.S.C.S. § 544(a) and recover the interest for the estate under 11 U.S.C.S. § 550(a) while defendant had counterclaimed for a like declaration in its favor.

OVERVIEW: The dispute related to supposed inconsistencies among descriptions of the real estate. Plaintiff argued that due to a purported conflict in property descriptions, the mortgage’s description was ambiguous and could not be construed against the bona fide purchaser’s interests. Defendant argued that the entire property was subject to the validly recorded mortgage and that the trustee was not entitled to avoid the mortgage because a hypothetical bona fide purchaser would take subject to the mortgage, reasoning that as plaintiff had constructive notice of the mortgage’s applicability to the entire property, plaintiff’s avoidance claim failed as a matter of law. The court agreed with defendant. Noting the provision under state law that a reference to a title deed in a property conveyance had the same effect as if the entire description in the deed had been copied into the conveyance, the court held that the descriptions were not inconsistent because both could be given effect at the same time. Since the deed’s property description was effectively incorporated by reference into the mortgage, the entire property was encumbered and defendant was entitled to judgment as a matter of law.

OUTCOME: The court held that defendant was entitled to summary judgment and ruled accordingly.

BAP upholds denial of discharge due to false statements and false oath:

(IN RE DONAHUE) WILLIAM K. HARRINGTON, U.S. Trustee v. DONAHUE, 2011 Bankr. LEXIS 4951 (BAP 1^st Cir. 12/20/11)(Not for Pub.)

PROCEDURAL POSTURE: Appellee United States Trustee brought an adversary proceeding against appellant bankruptcy debtors seeking a denial of the debtors' discharge under 11 U.S.C.S. § 727(a)(4)(A) based on the debtors' false statements in their schedules and statement of financial affairs. The debtors appealed the order of the U.S. Bankruptcy Court for the District of New Hampshire [Haines sitting] which granted the Trustee's motion for summary judgment.

OVERVIEW: The Trustee contended that the debtors misrepresented, among other things, that they owned real property which they in fact previously sold, but the debtors asserted that the omission was not the result of fraudulent intent. The bankruptcy court held that denial of the debtors' discharge was warranted based on the debtors' false accounts and oaths. The debtors failed to disclose the pre-petition transfer of the real property which was a material omission, at the very least the debtors acted with reckless indifference as to the accuracy of their disclosures, and the debtors only disclosed the transfer after the Trustee discovered the sale. Further, despite the debtors' assertion of excusable inadvertence, the debtors fraudulent intent could be inferred from the numerous, accumulated false statements and omissions such as omitting prior encumbrances against the property and failing to disclose rental income and sale proceeds from the property.

OUTCOME: The order granting the Trustee's motion for summary judgment was affirmed.

Magistrate's Report & Recommendation is that fees cannot be collected on a discharged debt:

DE GAETANO v. LAPINSKI, 2011 U.S. Dist. LEXIS 148842 (D. Maine 12/22/11)(Margaret J. Kravchuk, U.S. Magistrate Judge)

R&R: This matter was referred to me for a recommended decision on the issue of attorney fees, following a post-judgment disclosure proceeding wherein Digga Downeast, LLC, as trustee, was ordered to turn over to the judgment creditor a certain real estate parcel in Jonesport, Maine. I ordered the parties to supplement their original memoranda by addressing three separate issues: (1) how can DeGaetano obtain attorney fees from the judgment debtor for fees spent as the result of a disclosure proceeding against a third party, when the sole basis to award those fees would be pursuant to a note that was merged into a judgment and the judgment was subsequently discharged in bankruptcy; (2) pursuant to what authority is a trustee liable for attorney fees under a trustee disclosure process such as this one; and (3) how did the judgment debtors schedule the assets of the dissolved LLC during their bankruptcy proceedings. The judgment creditor now concedes that there is no basis for an award of post-judgment attorney fees against the trustee (Supp. Mem. at 3, Doc. No. 100: "The plaintiff withdraws its claims for additional attorneys' fees against Digga . . .") I now recommend that the Court deny the motion for an award of additional post-judgment attorney fees against John and Linda Lapinski.

Chapter 13 debtors could not lien strip 2nd mortgage due to valuation:

In re: SARNO, 2011 Bankr. LEXIS 5019 (12/20/11)(Melvin S. Hoffman, Bankruptcy Judge).

PROCEDURAL POSTURE: Second mortgage creditor filed an objection to confirmation of the chapter 13 debtors' plan, which proposed to strip off the second mortgage and to treat the creditor's claim of approximately $65,000 as a general unsecured claim. Debtors also moved to amend their schedule A to reflect treatment of the loan.

OVERVIEW: Debtors asserted that the current value of their residence was only $315,000, and that the principal balance due on their first mortgage was $333,599. The second mortgage creditor introduced its own appraisal evidence that, as of December 17, 2010, the home was worth $350,000. The court rejected debtors' assertion that the value at the time of plan confirmation was the proper benchmark, and held that the petition date was the proper time of valuation. The undisputed evidence established that the principal balance of the first mortgage loan on the debtors' home as of the bankruptcy petition date was no greater than $334,500, and that debtors failed to meet their burden of proof that, on the petition date their home was worth no more than $334,500. Thus, the second mortgage claim was immune from modification under 11 U.S.C.S. § 1322(b)(2). Although the second mortgagee's issuance of an IRS Form 1099-C to debtors was a mistake, the error had been promptly corrected and debtors had not suffered any adverse tax consequences.

OUTCOME: Debtors' motion to amend schedule A to their bankruptcy petition was denied; the second mortgage creditor's objection to the plan was sustained.