Monday, March 5, 2012

Bankruptcy/Foreclosure Cases from the First Circuit, January 2012, Part Two

Pro se debtor’s appeal dismissed as moot:

(IN RE FOTIS FRANK MARMARINOS, a/k/a Fotis F. Marmarinos, a/k/a Fotis Marmarinos, a/k/a Fotis S. Marmarinos, a/k/a Fotios K. Marmarinos, a/k/a Fotios Marmarinos) FOTIS FRANK MARMARINOS, Appellant, v. MARK G. DEGIACOMO, Chapter 7 Trustee, Appellee, 2012 Bankr. LEXIS 337 (1st Cir. BAP 1/31/2012).
PROCEDURAL POSTURE: The United States Bankruptcy Court for the District of Massachusetts authorized appellee Chapter 7 trustee to compromise certain claims against a credit union. Appellant debtor, acting pro se, challenged the bankruptcy court's decision.
OVERVIEW: The debtor owned real property encumbered by two mortgages held by the credit union, which obtained relief from the automatic stay to foreclose on the second mortgage. The credit union was the successful bidder at the foreclosure sale. The debtor then filed a complaint in state court against the credit union. The trustee filed a motion to compromise, which the bankruptcy court granted after overruling the debtor's objection. The court held that the appeal was moot. The debtor never sought a stay of the compromise order. Absent a stay, the trustee was entitled to rely on the order, and he executed a stipulation of dismissal which was filed in the state court action. The state court then dismissed the state court action and closed the case. Thus, the settlement between the trustee and the credit union had been fully consummated. In addition, the property had been sold to a third party. As a result, even if the court were to address the issues the debtor raised in his appeal, it could not fashion any meaningful relief. The court could not compel the state court to revive the state court action and it could not unwind the sale of the property to a third party.
OUTCOME: The court dismissed the appeal as moot.

District Court affirms fraudulent transfer of wife’s real property and personal property to husband’s former employer to pay husband’s embezzlement debt, examining (1) tracing, (2) constructive trusts, (3) whether Chapter 13 debtor can bring a  §548 action, and (4) reasonably equivalent value:

Georgina C. Heilman v. Habitech, Inc. and D. Bruce Wheeler, 2012 DNH 8; 2012 U.S. Dist. LEXIS 3344 (D.N.H. 1/11/12)(NOT FOR PUBLICATION)( Joseph A. DiClerico, Jr., District Judge).
OVERVIEW: Where a non-debtor husband embezzled funds from his employer and the husband and debtor wife transferred their home to the employer in an attempt to satisfy the embezzlement debt, the bankruptcy court did not clearly err in finding that the debtor did not receive reasonably equivalent value for the transfer of her interests because the employer failed to adequately trace the embezzled funds to the purchase of the home and specific improvements to the home.
OUTCOME: Affirmed.
DISCUSSION: During her Chapter 13 bankruptcy case, Georgina Heilman brought an adversary proceeding to avoid the transfer of certain property to Habitech, Inc. and D. Bruce Wheeler, contending the transfer was fraudulent under 11 U.S.C. § 548(a). The bankruptcy court granted Heilman's claim in part and avoided the transfer of her personal property and her interest, but not her husband's interest, in their house. Heilman appealed, arguing that the entire transfer, including the transfer of her husband's interest in the house, was fraudulent and should be avoided. Habitech and Wheeler filed a cross-appeal, arguing that the transfer of the property was not fraudulent.

Georgina Heilman and her husband, Robert, rented a house in Windham, New Hampshire, (the "Windham House") from 1995 until 2000. In August of 2000, Erin, the couple's daughter, purchased the Windham House. The Heilmans continued to reside in the house and paid Erin rent until February 2003, when Erin transferred the house to the Heilmans for $1.00. At the same time, the Heilmans obtained a mortgage for $175,000. Shortly thereafter, the Heilmans began renovating the Windham House, which included adding rooms and remodeling the kitchen. In the spring of 2005, the Heilmans obtained an $80,000 home equity line of credit. A few months later, they added a two-car garage with a bedroom to the Windham House. Beginning in January of 2000 and continuing throughout the Heilmans' purchase and improvements of the Windham House, Robert was employed by Habitech.

In the fall of 2007, Habitech discovered that Robert had been embezzling funds from the company for several years. In total, Robert embezzled between $700,000 and $1.1 million during his employment with the company. On October 12, 2007, D. Bruce Wheeler, the co-founder and principal of Habitech, along with an outside accountant and a private investigator, confronted Robert about the embezzlement. Robert admitted to embezzling an undisclosed amount of money over several years. Wheeler then asked Robert to transfer to Habitech the deed to the Windham House, as well as some of the Heilmans' personal property, as partial repayment of the embezzled funds.

Robert called Georgina that same day, and made arrangements to meet her at the Windham House later that evening. Georgina arrived home from work that night after 11:00 p.m., to find Robert, Wheeler, and the others waiting for her. Wheeler insinuated that Georgina's cooperation would be helpful in terms of Robert's potential criminal liability and both of their continuing health coverage. Wheeler and the others also gave Georgina the impression that they would not leave until the Heilmans transferred their property to Habitech. That night, Georgina signed a Quitclaim Deed and a document titled "Transfer of all Property." Both documents were executed in the Windham House and signed by a notary public.

Habitech represents that the "Transfer of all Property" document purported to transfer to Habitech "[a]ll of the property owned by [the Heilmans] . . . real and personal, tangible and intangible, contingent and non-contingent, including but expressly not limited to, all of the furnishings and other contents in the [Windham House]." Wheeler took a computer and several pieces of Georgina's jewelry that night, and Georgina delivered an additional piece of jewelry to him a few days later. Georgina was not implicated in, and had no knowledge of, Robert's embezzlement, and had no liability to Habitech.

On or about January 14, 2008, Georgina filed for bankruptcy under Chapter 13 of the Bankruptcy Code. On or about April 2, 2008, Georgina filed a complaint against Habitech and Wheeler (hereinafter, "Habitech"), seeking to avoid her transfer of property that she made on October 12, 2007, on the ground that it was a fraudulent transfer. Robert, who is currently incarcerated, moved to intervene shortly before the adversary proceeding was set to begin. The bankruptcy court denied the motion.

After a hearing, the bankruptcy court entered judgment in favor of Georgina on the fraudulent transfer claim and avoided the transfer of her personal property and furnishings, as well as her interest in the Windham House. This appeal and cross-appeal followed.

Although the parties did not address the issue, the court notes that
§ 548 authorizes a bankruptcy trustee to avoid a debtor's fraudulent transfer. Based on the language of the statute, Heilman, as the debtor, would not have standing to avoid a transfer under § 548. Habitech moved to dismiss the adversary proceeding on this ground. The bankruptcy court denied the motion, but the parties did not provide the court with a copy of the bankruptcy court's decision.11 U.S.C. § 522(h) gives a Chapter 13 debtor standing to avoid a fraudulent transfer under § 548 if certain conditions are met. See, e.g., In re Dickson, 655 F.3d 585, 592 (6th Cir. 2011). The court is unable to determine, based on the appellate record, whether Heilman meets those conditions. Because Habitech did not raise the issue on appeal, the court will assume, without deciding, that Heilman has standing to avoid the transfer of her interest in the property under § 522(h).

Because Robert is not a debtor,
§ 548 does not apply to his interest in the Windham House. The bankruptcy court properly did not make any ruling with respect to Robert's interest in the house. Therefore, the bankruptcy court's decision to avoid the transfer of Georgina's interest in the house does not apply to Robert's interest.

Heilman also argues that her interest in the Windham House was 100% because she and Robert held the house as tenants in the entirety. Therefore, she contends, the transfer of the entire house should be set aside as fraudulent.  A tenancy in the entirety gives each tenant a 100% interest in the property. See
In re Snyder, 249 B.R. 40, 46 (B.A.P. 1st Cir. 2000). New Hampshire, however, does not recognize the ownership form of tenancy in the entirety. See Estate of Croteau v. Croteau, 143 N.H. 177, 180, 722 A.2d 464 (1998); see also Boissonnault v. Savage, 137 N.H. 229, 231, 625 A.2d 454 (1993). New Hampshire law provides that every conveyance of real estate made to two or more persons creates an estate in common or, if otherwise provided in the conveying deed, a joint tenancy. See Revised Statutes Annotated ("RSA") 477:18. Neither a tenant in common nor a joint tenant holds a 100% interest in the property. The Quitclaim Deed by which the Heilmans obtained the Windham House conveyed the house to them "as tenants by the Entirety." Under New Hampshire law, such language creates a joint tenancy. Therefore, Heilman held the Windham House as a joint tenant with her husband and did not have a 100% interest in the house.

Accordingly, the bankruptcy court's order avoiding the October 12, 2007, transfer of the Windham House applies to only Georgina's interest in the house, and not to Robert's. Because Georgina's interest in the Windham House was less than 100%, the bankruptcy court's order does not require avoidance of the entire transfer.
Habitech argues that it held a constructive trust on the Windham House at the time of the transfer, and that, therefore, Heilman did not have an interest in the house to transfer. Further, Habitech argues that even if Heilman did have an interest in the house, she received reasonably equivalent value for her
Habitech argues that it held the Windham House in a constructive trust at the time of the transfer because the house was purchased and renovated with funds Robert embezzled from Habitech. Based on its theory that it owned the house through a constructive trust, Habitech contends that Heilman cannot show that she had any interest in the house at the time of the transfer. Habitech asserts that the bankruptcy court erred in concluding that Heilman had an interest in the house for purposes of avoiding the transfer.  In the context of a bankruptcy proceeding, a party asserting a right to property based on a constructive trust must establish the elements of a constructive trust under state law and also trace the trust funds to the property. See In re Chew, 496 F.3d 11, 17 n.8 (1st Cir. 2007); Conn. Gen. Life Ins. Co. v. Univ. Ins. Co., 838 F.2d 612, 618-19 (1st Cir. 1988). The bankruptcy court did not address the elements of a constructive trust under New Hampshire law, and Habitech does not raise an issue with respect to those elements on appeal. Instead, the bankruptcy court concluded that Habitech failed to trace adequately the embezzled funds to the Windham House. Habitech argues that the bankruptcy court's factual findings do not support the conclusion.When funds subject to a constructive trust have been commingled with other property of the debtor, the party asserting rights as a trust beneficiary bears the burden of sufficiently tracing the trust funds to the property. Conn. Gen. Life, 838 F.2d at 618-19; see also In re Fin. Res. Mortg., Inc., 454 B.R. 6, 17 (Bankr. D.N.H. 2011). It is insufficient to show that the trustee of the constructive trust was enriched by the funds or that the funds generally added to the value of the trustee's estate. Conn. Gen. Life, 838 F.2d at 619. Instead, the trust funds "must be clearly traced and identified in specific property." Id. (internal quotation marks omitted); see also In re DeSteph, 2010 Bankr. LEXIS 1593, 2010 WL 2206983, at *11 (Bankr. D.N.H. May 26, 2010) (tracing requirement was not satisfied because plaintiff could not directly trace a down payment on a condominium back to embezzled funds as opposed to the debtor's own money). This is so because "the constructive trust encumbers the property only to the extent of the funds traceable from the alleged fraud."

The bankruptcy court noted that Habitech's constructive trust theory was an "after-the-fact rationalization[] of value for what was transferred." The court also noted that Habitech did not have a pre-petition judgment that established a constructive trust. Instead, Habitech was asserting the constructive trust theory in the bankruptcy proceeding.  Habitech argues that the bankruptcy court erred by ruling that a constructive trust had to have been in place by judgment before the bankruptcy is filed. Habitech is correct to the extent that under New Hampshire law, "[a] constructive trust arises at the time of the occurrence of the events giving rise to the duty to reconvey the property." Curtis Mfg. Co., Inc. v. Plasti-Clip Corp., 933 F. Supp. 94, 106 (D.N.H. 1995) (internal quotation marks and citation omitted). The bankruptcy court, however, stated only that absent a prior judgment of a constructive trust, Habitech is in the position of an unsecured  creditor and must demonstrate to the court the existence of a constructive trust.  Pertinent to the constructive trust theory, the bankruptcy court found that "[t]hrough the course of [Robert's] embezzlement[,] the funds that he took wrongfully from Habitech found their way into purchase and improvements to real estate, into vacations, into — into some other acquisitions." The bankruptcy court also found that the Heilmans' legitimate earnings were less than the amount of their expenditures during the period when Robert was embezzling funds from Habitech. Nevertheless, the court found that Georgina did not know about the money Robert embezzled. The court concluded that Habitech did not trace adequately the embezzled funds to the house.

Contrary to Habitech's argument on appeal, the bankruptcy court did not find that the Heilmans paid for the Windham House and the renovations with embezzled funds. At most, the court found that the embezzled funds were commingled with the Heilmans' earnings and that together the funds and earnings paid for the Heilmans' home, vacations, and other expenses. A finding of commingled funds puts the burden on Habitech to clearly trace the embezzled funds to the  house, which the bankruptcy court found Habitech failed to do. Habitech has not shown that the bankruptcy court's conclusion was based on clearly erroneous factual findings or on a legal error.

Habitech argues that even if Heilman's interest in the Windham House was free from a constructive trust, the transfer of all of Heilman's property, including her interest in the Windham House, was not fraudulent. Habitech contends that Heilman received reasonably equivalent value for the transfer.
"Determination of reasonably equivalent value under § 548(a)(1)(B) is a two-step process. The Court must first determine whether the debtor received value, and then examine whether the value is reasonably equivalent to what the debtor gave." In re Feeley, 429 B.R. 56, 63 (Bankr. D. Mass. 2010) (internal citation omitted); see also In re Nat'l Envtl. Sys. Corp., 111 B.R. 4, 12 (Bankr. D.N.H. 1989). The determination of whether consideration is reasonably equivalent value is a question of fact.

Here, the bankruptcy court determined that Heilman did not receive fair or adequate consideration for the transfer of her property and, therefore, did not receive reasonably equivalent value. Habitech asserts that the bankruptcy court erred because embezzled funds were used to pay for the purchase and renovations of the Windham House, and therefore, the transfer to Habitech merely offset the value of the embezzled funds.  As discussed above, Habitech failed to trace adequately the embezzled funds to the purchase and specific improvements to the Windham House. Therefore, Habitech cannot claim that the transfer of Heilman's interest back to Habitech is an offset of the value of the embezzled funds.

Habitech further argues that the transfer of all of Heilman's property was the satisfaction of an antecedent debt and therefore, should be considered reasonably equivalent value. The bankruptcy court found, however, that Heilman did not have any liability to Habitech and thus, did not have an antecedent debt to repay. Whether Robert had an antecedent debt is irrelevant, as "
the payment of another's debt is held to be a transfer without fair consideration." Therefore, the bankruptcy court's determination that Heilman did not receive reasonably equivalent value for the transfer of her property to Habitech was not clearly erroneous or a legal error.

Chapter 11 case dismissed as debtor's post-petition income did not cover post-petition expenses and his real estate values were declining, all to the detriment of the secured creditor:

IN RE: OSCAR TORRES DE JESUS, 2012 Bankr. LEXIS 307 (Bankr. D.P. R. 1/23/12).
PROCEDURAL POSTURE: Debtor filed a petition under Chapter 11 of the Bankruptcy Code and operated a dairy farm and other businesses he owned as a debtor-in-possession. A bank that held secured claims against the debtor's property filed a motion seeking an order under 11 U.S.C.S. § 1112(b) that dismissed the debtor's case. The debtor opposed the bank's motion.
OVERVIEW: The debtor declared Chapter 11 bankruptcy in December 2010, and a bank that was the debtor's largest creditor asked the court to dismiss the debtor's case, claiming that the value of the debtor's property was declining and that the debtor had no prospect of reorganizing his businesses. The court found that there was sufficient cause under
11 U.S.C.S. § 1112(b)(4)(A) and (F) to dismiss the debtor's case, that there were no unusual circumstances that precluded dismissal, and that the case should not be converted to one under Chapter 7 of the Bankruptcy Code. Although the debtor was involved in several businesses, his largest business was dairy farming and that business was losing money. At the time the debtor declared bankruptcy, he owed the bank $12,041,132, and by the time the court heard the bank's motion, the value of his estate had been reduced to $6,318,000. The debtor had a monthly income of approximately $88,543 and average monthly expenses of $112,174, so he was still losing money, he had stopped making payments on debts he owed to two banks, and he had not timely filed all monthly reports he was required to file as a debtor-in-possession.
OUTCOME: The court granted the bank's motion.
JUDGE: Enrique S. Lamoutte Inclán, Chief, U.S. Bankruptcy Judge.

Filing dubious proof of claim does not violate Fair Debt Collection Practices Act;
No Rule 11 Sanctions without complying with the rule's "safe harbor" provision:

(In re: JOSE LUIS CLAUDIO, SR.) CLAUDIO v. LVNV FUNDING, LLC, 463 B.R. 190; 2012 Bankr. LEXIS 140 (Bankr. D. Mass. 1/13/12)(Henry J. Boroff, Bankruptcy Judge).
PROCEDURAL POSTURE: Plaintiff Chapter 13 debtor filed an adversary proceeding against defendant LLC, claiming that the LLC violated the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C.S. § 1692 et seq., when it filed two claims against his bankruptcy estate. The debtor filed a motion for sanctions under Fed. R. Bankr. P. 9011 and amended his complaint by adding a count seeking sanctions under Rule 9011. The LLC filed a motion to dismiss.
OVERVIEW: The debtor claimed that the LLC violated the FDCPA when it filed two claims against the debtor's bankruptcy estate that were time-barred under Massachusetts law, and he asked the court for an award of damages under the FDCPA and to impose sanctions on the LLC pursuant to
Fed. R. Bankr. P. 9011. The court found that the LLC did not violate the FDCPA, and it refused to impose sanctions under Rule 9011. because the debtor did not give the LLC notice of the violation and 21 days to correct it before he asked for sanctions. Numerous federal courts had held that the FDCPA was inapplicable to the filing of proofs of claim in bankruptcy cases, regardless of whether the underlying claim was stale or invalid for any other reason, and debtor did not comply with Rule 9011(c)(1)(A), which required him to give the LLC notice of the violation and 21 days to correct it before he asked for sanctions. The court noted that the debtor had not filed an objection to the LLC's claims, pursuant to 11 U.S.C.S. § 502.
OUTCOME: The court granted the LLC's motion to dismiss and denied the debtor's motion for sanctions.

No comments:

Post a Comment