Sunday, April 29, 2012

Recent Bankruptcy related decisions in the 1st Circuit in April 2012, Part 1 of 4.

Ch. 7 debtor’s failure to schedule a cause of action as an asset, when discovered, in his Ch. 7 case, barred the debtor from pursuing the action under the theory of judicial estoppel:

GUAY  v. THOMAS BURAK, Commissioner of the Department of Environmental Services for the State of New Hampshire; CONCORD POLICE DEPARTMENT; MICHAEL A. DELANEY, NH Attorney General; SEAN FORD, Detective, Concord Police Department; CONCORD, NH, 2012 U.S. App. LEXIS 7957 (1st cir. 4/19/12) (Before Justices Boudin, Selya & Lipez, Circuit Judges, Opinion by Justice Lipez).
OVERVIEW: Plaintiffs brought an action against defendants, government officials and a police officer, seeking damages for an allegedly illegal search of his property. The United States District Court for the District of New Hampshire granted summary judgment based on judicial estoppel to defendants. One plaintiff appealed.  Plaintiffs brought the claims while engaged in a Chapter 7 bankruptcy action (they arose during the Ch. 11 case, before it converted to CH. 7). However, they failed to amend their bankruptcy schedules, as required, to disclose the existence of his claims as newly acquired assets prior to obtaining a discharge from bankruptcy. As a result, defendants moved for summary judgment on the basis of judicial estoppel, even though plaintiff's failure to disclose his claims did not give him an unfair advantage in this proceeding. They claimed it was enough that appellant successfully adopted a position in the bankruptcy proceeding inconsistent with the position he took in this case. The district court agreed. The appellate court held that to allow plaintiff to rely on a belated report of unpaid obligations to the bankruptcy trustee under these circumstances would neither serve the equities of the instant case nor create the proper incentive for future debtors to disclose assets in a bankruptcy proceeding completely and accurately. Furthermore, allowing such conduct would similarly diminish the judicial estoppel doctrine's ability to deter the debtor from pursuing claims in the district court to which he was not entitled.
OUTCOME: The appellate court affirmed the judgment of the district court.
DISCUSSION:  The equitable doctrine of judicial estoppel is ordinarily applied to "prevent[] a litigant from pressing a claim that is inconsistent with a position taken by that litigant either in a prior legal proceeding or in an earlier phase of the same legal proceeding." Alternative Sys. Concepts, 374 F.3d at 32-33 (quoting InterGen N.V. v. Grina, 344 F.3d 134, 144 (1st Cir. 2003)). Where one succeeds in asserting a certain position in a legal proceeding, one may not assume a contrary position in a subsequent proceeding simply because one's interests have changed. New Hampshire v. Maine, 532 U.S. 742, 749, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001). We have explained that, "[t]he doctrine's primary utility is to safeguard the integrity of the courts by preventing parties from improperly manipulating the  machinery of the justice system." Alternative Sys. Concepts, 374 F.3d at 33. Although we have characterized the archetypal judicial estoppel case as one in which a litigant is "playing fast and loose with the courts," id. (internal quotation marks omitted), such tactics are not a prerequisite for application of the doctrine. "[A] party is not automatically excused from judicial estoppel if the earlier statement was made in good faith." Thore, 466 F.3d at 184 n.5. 
       There are two generally agreed-upon conditions for the application of judicial estoppel. "First, the estopping position and the estopped position must be directly inconsistent, that is, mutually exclusive." Alternative Sys. Concepts, 374 F.3d at 33. "Second, the responsible party must have succeeded in persuading a court to accept its prior position." Id. There is also a third oft-considered factor that asks "whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped." New Hampshire, 532 U.S. at 751. We generally have not required a showing of unfair advantage. See Thore, 466 F.3d at 182 (noting that this circuit has "rejected [benefit] as a prerequisite to application of the doctrine"); Alternative Sys. Concepts, 374 F.3d at 33 (noting that unfair advantage is "not a formal element of a claim of judicial estoppel"). Where unfair advantage exists, however, it is a powerful factor in favor of applying the doctrine. See Perry v. Blum, 629 F.3d 1, 8-9 (1st Cir. 2010); Alternative Sys. Concepts, 374 F.3d at 33.

Creditor's action to collect a debt for post-petition arrearages did not violate discharge injunction:

(IN RE: ARZUAGA, MOLINA); ARZUAGA, MOLINA v. QUANTUM SERVICING CORP, 2012 Bankr. LEXIS 1443 (Bankr. D.P.R. 4/3/12)(Brian K. Tester, Bankruptcy Judge).
OVERVIEW:  Plaintiff debtors initiated this adversary proceeding against defendant, a mortgage servicer and debt collector, upon filing a complaint for alleged damages and violations of the discharge injunction pursuant to 11 U.S.C.S. § 524, and the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C.S. § 1692 et seq. The court ordered bifurcation of the case into two stages, liability and damages. A trial on the liability issue was held. The parties did not contest that the debt collector received actual notice of the discharge order. It was the debt collector's position that all collection efforts were made post-discharge, for post-petition arrears that were not discharged. Based on the testimony received by the court and the documentary evidence submitted, the court found that all of the debt collector's collection actions followed the discharge order of May 28, 2008, and none of its collection actions occurred prior to that date. Moreover, the amounts claimed by the debt collector following the discharge order were for monthly payments owed by debtors for the period between June 2008 and January 2009, which was also post-discharge order.    
       Therefore, the debt collector's actions did not violate the discharge injunction. Dismissal of the discharge injunction cause of action was proper pursuant to Fed. R. Civ. P. 12(b)(6). Next, the court concluded that debtors' cause of action under the FDCPA would have no effect whatsoever on the bankruptcy estate. No nexus existed between the determination of this controversy and the administration of the estate. The court had no jurisdictional authority over the FDCPA claim.
OUTCOME: The complaint was dismissed.
DISCUSSION:  Although §524(a)(2) does not specifically authorize a remedy for its violation, a bankruptcy court is authorized to invoke 11 U.S.C. § 105 to enforce the discharge injunction imposed by 11 U.S.C. § 524 and order damages for the debtor. Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444-45 (1st Cir. 2000); In re Duby, 451 B.R. 664, 670 (1st Cir.BAP. 2011). Nonetheless, Plaintiffs  [*8] need to prove a violation of the discharge injunction.  The parties in this case do not contest that Quantum received actual notice of the discharge order. It is Quantum's position that all collection efforts were made post discharge, for post-petition arrears that were not discharged.  Based on the testimony received by the Court and the documentary evidence submitted by the parties, the Court finds that all of Quantum's collection actions followed the discharge order of May 28, 2008, and none of Quantum's collection actions occurred prior to that date. This conclusion has been conceded by Plaintiffs. Moreover, the amounts claimed by Quantum following the discharge order were for monthly payments owed by Plaintiffs for the period between June 2008 and January 2009, which is also post discharge order. Therefore, the Court finds that Quantum's actions did not violate the discharge injunction.
       Violation of the FDCPA:  Plaintiff's second cause of action alleges a violation of the FDCPA by Quantum and seeks damages. The FDCPA is a consumer protection statute enacted to provide consumers a remedy after they have been subjected to abusive, deceptive and unfair debt collection practices. 15 U.S.C. §1692. Plaintiffs base their cause of action under the FDCPA on the allegedly false representations made by Quantum while attempting to collect from Plaintiffs, in particular, the existence of debt which turned out to be an amount that had been paid and was not owed by Plaintiffs.  In determining if Quantum's actions constitute a violation of the FDCPA, the Court should first ascertain its jurisdiction to entertain this controversy. During trial, Quantum called into question the Court's jurisdiction over the FDCPA claim. Quantum's argument is based on the Court's determination that there was no violation of the discharge injunction and, consequently, the lack of nexus between the remaining cause of action under FDCPA and the bankruptcy estate.  Because of the constitutional limits imposed upon bankruptcy court jurisdiction, distinguishing between core and non-core proceedings is vital to the exercise of jurisdiction by a bankruptcy court. A bankruptcy court may hear and finally determine all core bankruptcy proceedings; the parties' agreement is not needed. 28 U.S.C. § 157(b). In non-core "related to" proceedings, however, only the district court may enter final orders absent consent of the parties. 28 U.S.C. § 157(c).  Whether the claims are sufficiently "related to" a bankruptcy case is a question of whether they are "sufficiently connected" to the debtor's reorganization.
       The Third Circuit has established a much-cited standard for determining whether a proceeding is "related." In Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir. 1984), the court described the test as whether "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." The First Circuit has recognized this standard. Simply stated, if the determination of the controversy could have an effect on the bankruptcy estate, the controversy is a "related matter." 28 U.S.C.A. § 157(a).  A FDCPA claim does not "arise under" or "arise in" a Title 11 case, nor is it "related to" a Title 11 case because win, lose or draw, the outcome of Plaintiffs' FDCPA claim cannot conceivably have any effect on the bankruptcy estate because the Plan has been completed and because the discharge has been entered.

District Court affirms debtor’s settlement with creditor:

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.

Bankruptcy court upholds Trustee’s objections to exemptions:

IN RE: VIVIANA PEREZ HERNANDEZ, 2012 Bankr. LEXIS 1657 (Bankr. D.P. R. 4/13/12)(Enrique S. Lamoutte, Bankruptcy Judge).
OVERVIEW:  Chapter 7 trustee filed an objection to exemptions claimed by the debtor, including a homestead exemption pursuant to the Puerto Rico Home Protection Act (homestead only avaialbe under federal exemption limits, not under Puerto Rican law).  The court held that the debtor waived the homestead protection set forth in the Home Protection Act upon filing for bankruptcy. The Home Protection Act did not include any opt-out language and none could be inferred from its dispositions. The debtor also claimed an exemption for "cash on hand" pursuant to P.R. Laws Ann. tit. 26, § 1135, which exempted annuities. The court held that the debtor provided no evidence that the cash on hand was the product of an annuity or if it even qualified as such. The court also granted the trustee's objections to amounts claimed by the debtor for household goods and personal clothes that were in excess of the exemption amounts allowed under Article 249 of the Puerto Rico Code of Civil Procedure, P.R. Laws Ann. tit. 32, § 1130.
OUTCOME: The court granted the trustee's objections.

District Court affirms Bankruptcy Court’s finding of consent based on appellant Association’s actions or inactions albeit a close call that could have gone either way based on the record;
Debtor was not a trespasser:

In re IDC Clambakes, Inc., 2012 U.S. Dist. LEXIS 49981 (D. R. I. 4/10/12)(William E. Smith, District Judge).
OVERVIEW: The bankruptcy court held that appellee debtor was not a trespasser during a certain period because appellants, condominium associations, consented to the debtor's operation of a business. On appeal, the court held that the bankruptcy court's decision was not clearly erroneous because the actions of one of the associations and individual unit owners who patronized the debtor's business could have been reasonably understood to be intended as consent and the evidence supported the finding that the associations essentially sat back and allowed the debtor to build and operate a thriving business.
OUTCOME: The court affirmed in part and vacated in part the bankruptcy court's decision.
Having determined that the Bankruptcy Court's finding on consent was not based upon or tainted by its consideration of extra-record evidence, it still remains for this Court to assess whether that finding was clearly erroneous. The arguments of the parties boil down to a disagreement over what could reasonably be inferred from the record evidence of the Associations' actions (or inactions). The Associations argue that it was illogical and clearly wrong for the Bankruptcy Court to find that the Associations had consented at the same time that the parties had engaged in hard-fought litigation and a bitter dispute over title to the Reserved Area. They further argue that the only appropriate interpretation of their words and conduct was that they were pursuing their claims in court, while refraining from self-help.  
       Clambakes, on the other hand, argues that the Bankruptcy Court appropriately relied on a record that reflects nonfeasance and deliberate inaction on the part of the Associations.  In support of its contention that the consent determination was erroneous, the Associations argue that the Bankruptcy Court misconstrued the evidence upon which it relied. Without engaging each and every contention of the Associations, it suffices to say that these arguments go to the character and weight of the evidence; and, such determinations are best left to the finder of fact.
       Moreover, while the Associations attempt to pick apart the Bankruptcy Court's assessment of individual pieces of evidence and related findings of fact, it is clear that the Bankruptcy Court's decision rested on the record, as a whole, presented at trial. And looking at that record on appeal, it is apparent that this is a close case on the facts, with evidence supporting the arguments of both sides.  At the end of the day, while it may be true that one could fairly interpret the record as the Associations suggest, the Court cannot form "a strong, unyielding belief that a mistake has been made."  The Bankruptcy Court's determination that the Associations' deliberate inaction in the face of the construction and operation of a large, thriving business, coupled with the affirmative actions of Harbor Houses and individual unit owners who patronized the Regatta Club, could be "reasonably understood by another to be intended as consent," Restatement (Second) of Torts § 892, is supportable on a reasonable view of the record. See Boroff, 818 F.2d at 109.  Since a trespasser is "[o]ne who intentionally and without consent or privilege enters another's property," Bennett v. Napolitano, 746 A.2d 138, 141 (R.I. 2000) (emphasis added) (quoting Ferreira v. Strack, 652 A.2d 965, 969 (R.I. 1995)), and the Court has sustained the consent determination, Clambakes was not a trespasser during the period in question.  Most importantly, this argument was not raised before the Bankruptcy Court below and is, accordingly, not properly before this Court on appeal.  Accordingly, the question of whether Clambakes trespassed after April 7, 2005 was simply not before the Bankruptcy Court, and that determination is hereby vacated.
OPINION:  For the reasons set forth in this opinion, 6 the decision of the Bankruptcy Court is AFFIRMED in part and VACATED in part.

District Court affirms Bankruptcy court’s finding that the IRS was the senior lien holder on the debtor’s accounts receivables, and, Determination rested on examination of what makes IRS a senior lien holder under federal law;
Federal law determines priority disputes between the IRS and secured creditor both claiming liens in the collateral;
Judicial notice discussed;
Court has no duty to inform counsel as to how to properly be noticed, it is up to them to “do their own homework”;
It is the duty of counsel to monitor the docket to keep him or herself apprised of case events and cannot rely on technical complaints as to service:

OVERVIEW:  Appellant argued on appeal that the bankruptcy court erred in finding that the IRS was the senior lien holder over debtor's accounts receivables. The determination of a priority status of an IRS lien was governed exclusively by federal law.  Pursuant to 26 U.S.C.S. § 6323(c)(1) and (3), any property acquired by debtor for services rendered that was generated on or after March 1, 2010, the date when the statutory harbor period of 45 days elapsed, were subject to the IRS statutory lien priority. In sum, the bankruptcy court's finding that the IRS was the senior lien holder was not error.
OUTCOME: Decision affirmed.
DISCUSSION:  Pending before the Court are two appeals which have been consolidated, as both are intrinsically intertwined. In both cases, appellant Banco Popular challenges the decision of the bankruptcy court finding that the IRS "is the senior lien holder over Debtor's [Reitter Corporation d/b/a Hospital San Gerardo (hereinafter "Reitter")] accounts receivable which were generated on or after March 1, 2010.”  Both appeals, that is, are dismissed, albeit on different grounds.  The main issues before the Court are: (a) whether the bankruptcy court erred in finding that the IRS is the senior lien holder of Reitter's accounts receivable that were generated by services rendered on or after March 1, 2010, pursuant to 26 U.S.C. § 6323(c)(3); (b) whether the parties were properly notified under the applicable bankruptcy rules; (c) whether the bankruptcy court erred in taking judicial notice of the documents that are part of the record; and (d) whether the bankruptcy court erred by failing to inform counsel the procedure to be followed when challenging a lien priority and/or the use of cash collateral.
       On December 6, 2010, the IRS filed a Motion to Prohibit Use of Cash Collateral. The core of the issues on appeal stems from the United States' opposition to the use of cash collateral, and BPPR's reply thereto. In a nutshell, the United States allege that, pursuant to 26 U.S.C. § 6323(c)(3), the IRS is the senior lien holder of Reitter's accounts receivable which were generated 45 days from January 14, 2010, date when the IRS recorded its first Notice of Federal Tax Lien with the United States District Court for the District of Puerto Rico.  BPPR argues that it has a secured claim duly guaranteed by Reitter's property under applicable Puerto Rico law.
       The record shows that both parties have filed their briefs. The Court deems this matter is submitted without a hearing. The Court finds that the bankruptcy court's Opinion and Order of May 13, 2011 is very thorough, hence, a hearing on this matter is not warranted.
       In United States v. Bank of Celina, 721 F.2d 163, 166-167 (6th Cir.1983), the Court held that, [i]f property to which a tax lien has attached is held by a third party who also possesses a lien, the issue then becomes one of lien priority." Id. "Federal law controls priority disputes, citing Aquilino v. United States, 363 U.S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365, 1960-2 C.B. 477 (1960); United States v. Acri, 348 U.S. 211, 213, 75 S. Ct. 239, 99 L. Ed. 264, 1955-1 C.B. 547 (1955)." Id.
       As noted above, for a private security interest to take priority over a federal tax lien, the interest must be in qualified property, meaning the property must be a type of commercial financing security acquired prior to, or within 45 days after, the federal tax lien filing. See 26 U.S.C. § 6323(c)(1) and (2)." (Emphasis ours).  The Court finds that the gist in the instant case lies on the FTLA provisions, 26 U.S.C. § 6323(c), and the definition of a commercial transaction financing agreement, as opposed to a commercial financing security, and what constitutes "qualified property" under the commercial security agreement. See American Investment Financial, 476 F.3d at 815-816, for a detailed analysis on these three provisions.  In the instant case, it is uncontested that BPPR has a valid, duly recorded commercial transaction financing agreement under Puerto Rico law. As stated by the IRS in its brief, "under 26 U.S.C. § 6323(c), Banco Popular's interest  in the debtor's [Reitter] accounts receivable is superior to the United States' federal tax liens only if (1) the security agreement was entered into prior to the tax lien filing; (2) the loan to the debtor was extended without Banco Popular's having prior knowledge of the United States' federal tax liens, and prior to the filing of the federal tax lien or within 45 days afterward; and (3) the debtor [Reitter] acquired the property at issue within 45 days after the filing of the notice of federal tax lien." (Emphasis in the original). "Of these elements, only the third is at issue here." The Court agrees and briefly explains.
       The record is clear that, on January 14, 2010, prior to the filing of Reitter's bankruptcy petition, the IRS recorded its Notice of Federal Tax Lien with the United States District Court for the District of Puerto Rico, followed by the recording of other prepetition notices of tax liens. Hence, pursuant to 26 U.S.C. § 6323(c)(1) and (3), any property acquired by Reitter for services rendered, such as, accounts receivable as well as payments received from accounts receivable generated on or after March 1, 2010,  [*18] the date when the statutory harbor period of 45 days elapsed, are subject to the IRS statutory lien priority. As stated above, the determination of a priority status of an IRS lien is governed exclusively by federal law. See Bank of Celina, 721 F.2d 163; American Investment Financial, 476 F.3d 810, and the collection of cases cited in both cases. In sum, the Court agrees with the bankruptcy court's finding that the IRS is the senior lien holder of Reitter's accounts receivable generated on or after March 1, 2010.5.
       In In re Pabón Rodríguez, 233 B.R. 212, 229 (Bankr.D.P.R.1999), the Court, citing In re Mayhew, 223 B.R. 849 (D.R.I.1998), held: "Rather, it is the duty of an attorney to monitor the docket and to keep him or herself apprised of developments in a case." (Emphasis ours). See also In re O.P.M. Leasing Services, Inc., 769 F.2d 911 (2d Cir.1985); Wheat v. Rieser, 452 B.R. 627 (D.S.D.Ohio 2011).

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