Recent Bankruptcy Decisions within the First Circuit, March 2012 Cases, Part 1 of 3.

Debtor’s settlement upheld on appeal:

BEACON INVESTMENTS LLC, et al., Appellants, v. MAINEPCS, LLC, et al., Appellees,

2012 U.S. Dist. LEXIS 44091 (D. Maine 3/28/12)(JOHN A. WOODCOCK, JR., District Judge, Chief).

ORDER ON BANKRUPTCY APPEAL:  Secured creditors of a bankrupt debtor business challenge on appeal the Bankruptcy Court's approval of the settlement of pending litigation between the bankrupt business and a competitor. This Court concludes that the Bankruptcy Court's approval did not abuse its discretion, that the appellants waived the right to assert that the Bankruptcy Court should have applied the "entire fairness" standard but that even if it had done so the result would have been the same, and that two of the three members of the business had the authority to enter into the settlement agreement.

“Fee Only” cases in Chapter 13 are not per se bad faith and may be permitted in some rare instances:

IN RE WAYNE ERIC PUFFER, Debtor. L. JED BERLINER, Movant, Appellant, v. DENISE M. PAPPALARDO, Trustee, Appellee, 2012 U.S. App. LEXIS 6037 (1^st Cir. 3/22/12)(Before Justices Selya, Souter (sitting by designation), and Lipez, Opinon by Selya, Lipez concurring).

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Michael A. Ponsor, U.S. District Judge. Hon. Henry J. Boroff, U.S. Bankruptcy Judge.

PROCEDURAL POSTURE: After debtor's chapter 13 filing was converted to a chapter 7 filing by the Bankruptcy Court, appellant, debtor's attorney motion for an award of fees was denied. The United States District Court for the District of Massachusetts affirmed the denial. Appellant sought appellate review.

OVERVIEW: The chapter 13 plan was a "fee-only" plan that paid debtor's lawyer and the trustee their professional fees but left the general creditors holding an empty (or nearly empty) bag. The bankruptcy court rejected the proposed plan on the grounds that neither debtor's petition nor the plan itself was submitted in good faith, 11 U.S.C. Section 1325(a)(3),(7), citing a case which held that fee-only chapter 13 plans were per se submitted in bad faith. Then the bankruptcy court told debtor he could amend his chapter 13 plan, convert to a chapter 7 filing, or dismiss the case. He chose to convert and ultimately received a discharge. As the bankruptcy court awarded the attorney less than the retainer he had collected, he was required to disgorge more than $200. The appellate court held that the bankruptcy court erred as a matter of law in adopting the per se rule. As the fee award rested on a legal error, it had to be vacated. What remained was for the bankruptcy court to reconsider, under the proper legal regime, the question of the entitlement to fees and to issue a new order in that regard. The court took no view as to the amount of fees, if any, that should be awarded.

OUTCOME: The appellate court reversed the order appealed from and remanded to the district court with instructions to vacate the bankruptcy court's fee order and remand to that court for further proceedings consistent with this opinion. All parties shall bear their own costs.

DISCUSSION:  This bankruptcy case involves a dispute over attorneys' fees. Resolving this dispute requires us to address a question of first impression at the appellate level concerning the propriety of so-called "fee-only" plans in Chapter 13 bankruptcy cases.  This is an issue that has divided the bankruptcy courts. The bankruptcy court in this instance concluded that such plans are per se proffered in bad faith and disallowed virtually all attorneys' fees. On an intermediate appeal, the district court upheld the bankruptcy court's ruling. The matter has now been appealed to this court. We have had the benefit of briefing (including the helpful submission of an amicus) and oral argument. After careful consideration, we hold that fee-only plans are not per se in bad faith. Consequently, we reverse the order appealed from and remand for further proceedings consistent with this opinion.

Failure to disclose leads to denial of discharge:

(In re: DAVID M. FONTAINE)NICKLESS v. FONTAINE, 2012 Bankr. LEXIS 1247 (Bankr. D. Mass. 3/23/12)(Melvin S. Hoffman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff bankruptcy trustee brought an adversary proceeding against defendant bankruptcy debtor seeking denial of the debtor's discharge under 11 U.S.C. Section 727(a) based on the debtor's failure to disclose financial transactions, failure to provide financial information, and transfer of property after filing his bankruptcy petition.

OVERVIEW: The trustee contended that the debtor failed to disclose a lawsuit, transfers of real property and condominium units, and business activities, and also asserted that the debtor failed to provide financial information requested by the trustee and transferred a horse for no consideration after filing the debtor's bankruptcy petition without authorization of the court. The bankruptcy court held that denial of the debtor's discharge was warranted based on the debtor's false statements in his schedules and statement of financial affairs. The debtor failed to disclose a recovery from a lawsuit, income from sales of real property and condominiums, and several business activities in which the debtor engaged, and the debtor's fraudulent intent could be inferred from the cumulative effect of the debtor's reckless indifference to the truth of the debtor's statements. However, the trustee's request for financial records was only provided to the debtor's counsel with no indication that the debtor possessed the records, and it was possible that the debtor gave away the horse believing it had little or no value and without realizing that the debtor required court approval for the transfer.

OUTCOME: Judgment was entered in favor of the trustee in part with regard to denial of discharge based on false oaths and accounts, and judgment was entered in favor of the debtor in part with regard to failure to provide records and the post-petition transfer of property.

Bankruptcy Court’s cuts on fee application upheld on appeal:

Berliner v. Pappalardo (In re Sullivan), 2012 U.S. App. LEXIS 5926 (1^st Cir. 3/21/12) (Before Justices Selya, Souter [Retired Supreme Court Justice sitting by designation] and Lipez, Opinion by Selya).

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Michael A. Ponsor, U.S. District Judge. Hon. Henry J. Boroff, U.S. Bankruptcy Judge.

DISPOSITION: Affirmed.

PROCEDURAL POSTURE: Appellant debtors' bankruptcy attorney sought judicial review of the decision by the United States District Court for the District of Massachusetts affirming a bankruptcy court's attorney fee award. The attorney asserted that the legal fees awarded for professional services rendered in the Chapter 13 proceeding were too meager. He sought $8,173.36 more than the $3,684 retainer originally paid.

OVERVIEW: The bankruptcy court examined both the hourly rates and the number of hours billed. It accepted the rates but concluded that the attorney and his staff were claiming an excessive number of hours. The attorney asserted that the court committed three errors in reaching that conclusion. His contention that the bankruptcy court distorted the fee calculation by failing explicitly to identify and assess each of the factors enumerated in 11 U.S.C. Section 330 misconstrued the lodestar method. The bankruptcy court did enough to satisfy that standard. That it did not reference all of those factors explicitly was of no moment. He unsuccessfully challenged the bankruptcy court's determination that the debtors' case was relatively uncomplicated. The three ways in which he asserted the proceeding differed from the mine-run did not compel the conclusion that the attorney would have the appellate court draw. Finally, the bankruptcy court's explanation of its fee award did not have to proceed line by line through the fee application.

Denial of Stay Relief not a final judgment subject to appellate review:

 (In re INOFIN INCORPORATED)RAYMOND C. GREEN, INC., Appellant, v. MARK G. DEGIACOMO, Chapter 7 Trustee, Appellee, 2012 Bankr. LEXIS 936 (BAP 1^st Cir. 3/6/12) (Before Judges Haines, Lamoutte, and Kornreich, Opinion by Kornreich).

Appeal from the United States Bankruptcy Court for the District of Massachusetts. (Hon. Joan N. Feeney, U.S. Bankruptcy Judge). Bankruptcy Case No. 11-11010-JNF.

PROCEDURAL POSTURE: Appellant creditor challenged an order of the U.S. Bankruptcy Court for the District of Massachusetts denying its motion for relief from the automatic stay. The creditor sought a review of the bankruptcy court's preludial findings and conclusions on the validity of its security interest and the lawfulness of its secured party sale. Appellee was the chapter 7 trustee.

OVERVIEW: Because its jurisdiction was limited to appeals from final judgments, orders and decrees, the court first needed to determine if the order denying relief from the 11 U.S.C. Section 362 stay in this case was a final order. Ordinarily, the hearing on a motion for relief from stay was meant to be a summary proceeding, because such hearings did not involve a full adjudication on the merits of claims, defenses, or counterclaims, but simply a determination as to whether a creditor had a colorable claim to property of the estate. Thus, it followed that when relief from stay was denied because a moving party failed to make the necessary showing of a colorable claim in a non-evidentiary hearing, the order denying relief would not be a final order. This was particularly so when there was a pending adversary proceeding encompassing the same issues. Because the bankruptcy court's determination on the motion was inextricably intertwined with the unresolved issues in the adversary proceeding, entertaining an appeal at this time would have set the stage for the fragmentation of appellate review. The court lacked jurisdiction because the order denying relief from stay was not a final order.

OUTCOME: The appeal was dismissed.

Appeal dismissed as interlocutory, the District Court declining to grant discretionary leave to appeal:

STATE INSURANCE FUND CORP., Appellant, v. MEDSCI DIAGNOSTICS, INC., Appellee, 2012 U.S. Dist. LEXIS 32637 (D. P. R. 3/9/12)(Jose Antonio Fuste, District Judge).
OPINION AND ORDER:  Pending before this court is an appeal filed by creditor-appellant State Insurance Fund Corporation ("SIF") against debtor-appellee Medsci Diagnostics ("Medsci") arising out of a bankruptcy adversary proceeding. Under 28 U.S.C. Section 158(a), SIF challenges an order of the bankruptcy court finding that a contract for radiological diagnostic services between Appellant and Appellee "is not null and void . . . . and each party must comply with its terms."

OUTCOME:  Appeal dismissed as interlocutory.
DISCUSSION: This appeal arises from an adversarial proceeding in the bankruptcy court, in which Medsci has raised several claims, seeking "nine (9) remedies," including breach of contract, fraud or deceit, damages in tort or contract, "damages," "injunction," and "collection." Central to this appeal is the contract of September 7, 2007, in which Medsci agreed to provide radiological equipment services to SIF. In the adversary proceeding, as in this appeal, SIF has argued that Medsci provided medical professional services without proper incorporation as a professional service corporation in violation of Puerto Rico law and, thus, the contract was allegedly null and void. On June 8, 2010, the bankruptcy court held a hearing, in which it determined, inter alia, that the contract at issue in this case was not null and void. After further examination of testimony and the record, the bankruptcy court denied the SIF's motion for reconsideration on the contract issue in its Opinion and Order of November, 24, 2010, which laid out its comprehensive findings of facts and analysis. The bankruptcy court deemed the contract valid, finding, based on the evidence and testimony, that Medsci provided radiological equipment, maintenance for the equipment, and administrative services, but it did not practice medicine. (Id.) After the bankruptcy court denied SIF's subsequent motion to reconsider the November order, which denied its previous motion to reconsider, SIF filed this appeal challenging the contract's validity.  Under Section 158(a), this court also has jurisdiction to hear appeals "with leave of the court, from interlocutory orders and decrees, of bankruptcy judges . . . ." Section 158(a)(3). In determining whether to exercise our discretion to grant such leave to appeal, we "consider whether (1) the 'order involves a controlling question of law' (2) 'as to which there is substantial ground for difference of opinion,' and (3) whether 'an immediate appeal from the order may materially advance the ultimate termination of the litigation. Such leaves to appeal interlocutory orders are to be granted "sparingly and only in exceptional circumstances."  Court finds that the order at issue in this case lacks finality, and declines to grant discretionary leave to appeal this interlocutory order.

Violations of the discharge injunction must be brought as a contested matter rather than adversary proceeding, relying on 11 U.S.C. Section 524(a) and Section 105(a) as Section 524 does not create a separate cause of action:

(In re: TENCZAR) TENCZAR v. GABLE, 2012 Bankr. LEXIS 949 (Bankr. D. Mass. 3/8/12)(Henry J. Boroff, Bankruptcy Judge).

PROCEDURAL POSTURE: Defendants filed a motion to dismiss plaintiff debtor's adversary proceeding, which alleged that defendants violated the discharge injunction granted to the debtor by virtue of 11 U.S.C. Section 524(a)(2) and asked the court to hold defendants in contempt and award sanctions against them.

OVERVIEW: Defendants filed a complaint against the debtor in state court. The debtor obtained a discharge in bankruptcy. Included among the claims discharged were defendants' state court claims against the debtor. Defendants filed a second complaint in state court, naming the debtor as an "interested party" and two other parties, unrelated to the debtor, as the defendants. By virtue of a federal law count, the case was removed to the federal district court. The debtor filed a motion to dismiss, which the district court granted. Having secured dismissal of defendants' claims against him, the debtor commenced the instant adversary proceeding. Defendants argued that the debtor waived his right to seek reimbursement of legal fees as a sanction because his motion to dismiss in the district court did not seek reimbursement of legal fees. The court held that the remedy sought for violation of the § 524 injunction was never waived explicitly, implicitly, or as a matter of law as a result of his failure to file a counterclaim in the district court action. Only in pleadings did a defendant have to assert a compulsory counterclaim and the debtor never filed a pleading in the district court.

OUTCOME: The court denied defendant's motion; however, the court dismissed the adversary proceeding sua sponte and ordered the debtor to file any motion under § 524(a) and 11 U.S.C.S. § 105(a) within 21 days from the entry of the dismissal order so as to make the dispute a contested matter.

11 U.S.C.S. § 524 does not create a private right of action and violation of the discharge injunction should be enforced through contempt proceedings under 11 U.S.C.S. § 105. Fed. R. Bankr. P. 9020--Contempt Proceedings, provides that Fed. R. Bankr. P. 9014 governs such proceedings. Fed. R. Bankr. P. 9020. Rule 9014 broadly governs all "contested matters" and requires that such matters be requested by motion. Fed. R. Bankr. P. 9014. Accordingly, actions to enforce the discharge injunction and to seek sanctions on account of discharge injunction violations must be brought as contested matters and not by way of adversary proceedings.  

Bankruptcy Court denied debtors’ request to reopen Chapter 7 case to schedule and then exempt an asset under grounds of judicial estoppel and because there was no benefit to creditors:

IN RE: CLAUDIO; IN RE: RIVERA; IN RE: RIVERA, 2012 Bankr. LEXIS 1325 (Bankr. D.P.R. 3/28/12)(Enrique S. Lamoutte, Bankruptcy Judge).   
 OPINION & ORDER: The above captioned cases are before the court upon the debtors' request to reopen their individual case in order to amend the schedules to include an undisclosed cause of action and to claim an exemption over the same. The defendant in the undisclosed action, Santander Financial Services, Inc. ("Santander") has opposed the request on judicial estoppel grounds.  The factual background is substantially the same in all three cases. The debtors filed voluntary chapter 7 petitions in February and March 2010. Shortly after the 341 meeting of creditors the chapter 7 trustee in each of the cases filed a report of no distribution. The same was notified to all creditors. The debtors were granted a discharge and the cases were closed in May 2010 and August 2010. The debtors failed to disclose in the schedules filed in their individual bankruptcy cases that they had a prepetition cause of action against Santander.  On December 4, 2010, after their bankruptcy cases were closed, they filed an action before the U. S. District Court for the District of Puerto Rico against Santander for violations of the Fair Debt Collection Practices Act, 15 U.S.C. Section 1692 et seq. When Santander moved to dismiss the action on grounds of judicial estoppel and lack of standing in the district court case, the debtors opted to move the bankruptcy court to reopen the cases pursuant to 11 U.S.C. Section 350(b) alleging that the inadvertent mistake was counsel's fault for admittedly lack of experience in bankruptcy matters.  On October 31, 2011 the U.S. District Court for the District of Puerto Rico (Gelpi, U.S. District Judge)entered an order dismissing the action on judicial estoppel grounds as to the above captioned chapter 7 debtors. The court declined to dismiss the case as to chapter 13 debtor Carmen Delgado Ramirez

Judicial estoppel is an equitable doctrine aimed at protecting the integrity of the judicial process. The benefits of the bankruptcy process are reserved for the honest but unfortunate debtor. Judicial estoppel must be applied in bankruptcy to deter dishonest debtors from failing to fully disclose all assets as such failure undermines the bankruptcy system.  Section 350(b) provides that a case may be reopened "to administer assets, to accord relief to the debtor, or for other cause." A decision to reopen a bankruptcy case is within the discretion of the bankruptcy court. When a debtor moves to reopen a case to include an undisclosed asset the most important consideration is the benefit to creditors. The undisputed facts in the above captioned cases show that the debtors may not pursue the cause of action they intend to include in their respective schedules as the same has been dismissed by the district court. Consequently, there is no purpose to be served, and no benefit to creditors is discernible if the cases are reopened. Therefore, the court declines to reopen the cases to include the undisclosed cause of action. Moreover, property that is not formally disclosed by a chapter 7 debtor is not deemed abandoned by the Chapter 7 trustee and remains property of the estate. The chapter 7 debtor lacks standing to prosecute the undisclosed action. The party with standing to prosecute an action that the chapter 7 debtor failed to disclose for the benefit of creditors is an innocent trustee. 
OUTCOME:  In view of the foregoing, debtors' motions to reopen their respective cases are hereby denied.