Sunday, April 1, 2012

Recent Decisions in the First Circuit regarding Bankruptcy, February 2012 Cases, Part 1 of 3.

Capias writ issued against debtor as a corporate officer did not violate the automatic stay as against debtor in his individual bankruptcy case:

SLABICKI V.CARP (In re Slabicki), 2012 Bankr. LEXIS 344 (BAP 1st Cir. 2/3/12).
PROCEDURAL POSTURE: Plaintiff debtor filed an adversary proceeding seeking compensatory and punitive damages under 11 U.S.C.S. § 362(k)(1) against defendants, a creditor and constable, for allegedly violating the automatic stay, The U.S. Bankruptcy Court for the District of Massachusetts found no stay violation. Debtor appealed the judgment.
OVERVIEW: When a bankruptcy petition was filed, an automatic stay prevented creditors from taking any collection actions against a debtor or the property of the debtor's estate for pre-petition debts; 11 U.S.C.S. § 362(a). Debtor contended that defendants violated the stay when the creditor, through the constable in his employ, executed a capias against him in a civil action to enforce the creditor's prepetition judgment against a corporation of which debtor was president and sole shareholder. The bankruptcy court concluded that the actions in question were designed, intended, and appropriately limited to obtain recovery from the corporation, not debtor or his assets, and therefore, that there was no stay violation. The instant court found that the record supported the bankruptcy court's conclusion that there was no stay violation. Among other matters, the record supported the finding that the debt was owed solely to the corporation. Further, the bankruptcy court did not err in concluding that the automatic stay of debtor's personal bankruptcy case did not extend to the non-debtor corporation, nor did it prohibit actions taken against debtor in his capacity as a corporate officer.
OUTCOME: The judgment was affirmed.
JUDGES: Before Judge Lamoutte, Kornreich & Haines; Opinion by Lamoutte.  

Defendant’s criminal plea stands, for bankruptcy related crimes:

USA v. ANDRÉS NÚÑEZ, 2012 U.S. Dist. LEXIS 24206 (D.P.R. 2/24/12)(Opinion by District Judge Juan M. Perez-Gimenez).
Pending disposition by this Court is defendant’s motion to withdraw a plea of guilty.  Because the Court finds that Núñez has failed to raise enough facts to establish a fair and just reason for vacating his guilty plea, the Court DENIES his motion without a hearing. The plea related to an indictment that the defendant, amounst others, aided and abetted, as well as conspired in the concealment of assets belonging to a Chapter 11 bankruptcy estate, concealing approximately $200,000 of estate property through the use of covert bank accounts, which were unauthorized by the Bankruptcy Court. Furthermore, by failing to file monthly operating reports with said court, the Government denounces that Defendants were able to conceal another $700,000 of estate property, which were moving through the court-approved, Debtor in Possession (DIP) accounts. The Bankruptcy Court, which never had an opportunity to learn of the existence of these funds, ended up dismissing ALR's petition. See In re ALR Investment Corp. d/b/a Farmacia el Señorial, Case No. 03-06571 (JMD)(Bankr.D.P.R.). These events spurred the current criminal prosecution now before this Court.

Trustee’s objection to exemptions sustained where debtor claimed 100% of FMV in home and vehicle:

MASSEY v. PAPPALARDO, Chapter 13 Trustee (In re Massey), 2012 Bankr. LEXIS 756 (BAP 1st Cir.2/27/12).
PRIOR HISTORY:  Appeal from the United States Bankruptcy Court for the District of Massachusetts. Bankruptcy Case No. 11-41059-MSH. (Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge).
In re Massey, 2011 Bankr. LEXIS 5272 (Bankr. D. Mass., Aug. 1, 2011)
PROCEDURAL POSTURE: Appellant bankruptcy debtors claimed exemptions under 11 U.S.C.S. § 522(d) for 100 percent of the fair market value of their residence and a vehicle, but appellee bankruptcy trustee asserted that the exemptions exceeded statutory limits. The debtors appealed the order of the U.S. Bankruptcy Court for the District of Massachusetts which sustained the trustee's objection to the exemptions.
OVERVIEW: The debtors contended that claiming 100 percent of the fair market value of the residence and the vehicle was an exercise of the debtors' statutory right to claim in-kind exemptions of property with values which were plainly within the statutory exemption limits. The bankruptcy court held that the debtors' claimed exemptions were facially invalid since the debtors failed to state values for the residence and the vehicle, and the debtors improperly attempted to exempt the residence and the vehicle rather than the value of the assets.
OUTCOME: The order sustaining the trustee's objection to the claimed exemptions was affirmed.
JUDGES: Before Judges Lamoutte, Kornreich & Tester; Opinion by Tester.

Partial summary judgment granted against trustee in preference/fraudulent transfer action; Trustee failed to show debtor had an interest in the property at issue, debtor needs to trace funds:

Notinger v. Migliaccio (In re Financial Resources Mortgage, Inc. and C L and M, Inc., and other Debtors),  2012 Bankr. LEXIS 778 (Bankr. D.N.H. 2/29/12)( J. Michael Deasy, Bankruptcy Judge).
OVERVIEW: Court had before it defendant’s summary judgment motion (good recitation to SJ standard in an adversary proceeding) related to the Trustee’s attempted to avoid transfers as allegedly fraudulent transfers under 11 U.S.C. § 544(b) and NH RSA 545-A:4(I)(A) in Count III of the Complaint. The Trustee seeks the avoidance of various transfers by CLM and/or FRM as preferential under 11 U.S.C. § 547(b) in Count IV of the Complaint. The Trustee seeks to recover any transfers avoided under §§ 544, 547, or 548 pursuant to 11 U.S.C. § 550.  In order to recover on each of these counts the Trustee must establish a common element, i.e., that each of the transfers he seeks to avoid was of "an interest of the debtor in property."  The Trustee has the burden of proving this element, i.e., that what was transferred was "an interest of the debtor in property," in each count. Jenkins v. Chase Home Mortg. Corp. (In re Maple Mortg., Inc.), 81 F.3d 592, 596 (5th Cir. 1996) (stating the trustee has the burden of proving the elements of both preferential and fraudulent transfers, but acknowledging that in cases where the debtor has unfettered discretion over funds purportedly held in a constructive trust that the burden of proof shifts to the party asserting the existence of the trust to establish the trust's existence.  

The Bankruptcy Code does not define the phrase "an interest of the debtor in property." Jacobs v. Matrix Capital Bank (In re, Inc.), 315 B.R. 259, 272 (Bankr. E.D.N.Y. 2004). Courts have concluded, however, that the term is equivalent to the term "property of the estate" under 11 U.S.C. § 541.  Courts turn then to § 541 in order to determine the scope of property interests that are recoverable.  As the Supreme Court has explained: Because the purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate-the property available for distribution to creditors-"property of the debtor" subject to the preferential transfer provision is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.  Begier, 496 U.S. at 59.  Conversely, property that would not have been property of the estate cannot be recovered. Determining a debtor's property rights is a matter of state law.  Accordingly New Hampshire law determines whether CLM had an interest in the property that was transferred to the Migliaccios.

Money held in a bank account in the name of a debtor is presumed to be property of the estate.  To rebut this presumption, a party must show that it retained some right to the funds. Because of this presumption, the defendant in an avoidance action involving a commingled account has the burden of proving that the debtor only held legal title. One way to overcome the presumption that the equitable interest in a bank account is part of the estate is to show that the funds were being held in trust. The burden of proving the existence of an express trust is on the party asserting its existence.
It is clear to the Court that in order to create an express trust in New Hampshire there must be a proper manifestation of the intention to do so, either by the settlor or in communications between the settlor and the intended trustee. The settlor must make a transfer of the trust property to the trustee.  Proof of the intent to create a trust is not enough however (i.e. tracing required): When, as in this case, the trust res has been commingled, the Defendants must also trace each and every payment to them in order to establish that they have an equitable interest in the monies transferred to them that is superior to the interest of CLM or any other party.
OUTCOME:  Court will grant the Motion to the extent that the Trustee has asserted claims on behalf of the estate of FRM as the summary judgment record reflects that none of the transfers at issue involved funds ever titled to FRM. The Court will otherwise deny the Motion as there are genuine issues of material fact as to whether the Migliaccios can trace all of their funds.

Student loan not initially discharged, but debtor could discharge remainder after successful completion of Ford program:

(In re AYELE) AYELE v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, 2012 Bankr. LEXIS 739 (Bankr. D. Mass. 2/8/12)(Joan N. Feeney, Bankruptcy Judge).

The matter before the Court is the Amended Complaint filed by Begashaw Ayele ("Mr. Ayele" or the "Debtor") against Educational Credit Management Corporation ("ECMC"), through which Mr. Ayele seeks a discharge of his student loan obligations, totaling $30,605.83 as of October 20, 2011, pursuant to 11 U.S.C. § 523(a)(8). In his Complaint, Mr. Ayele, who has appeared in his Chapter 7 case and this adversary proceeding pro se, has alleged that, based upon his current financial circumstances, repayment of his student loans would constitute an undue hardship. He asserts that he would be unable to maintain a minimal living standard if he were required to repay the loans.

ECMC answered the Complaint, and the Court issued a Pretrial Order. In compliance with that order, the parties filed a Joint Pretrial Memorandum in which they stipulated to facts which are admitted and require no proof. The Court conducted a trial on November 2, 2011. At the trial, Mr. Ayele was the only witness. Because he appeared pro se, the parties agreed that Mr. Ayele could provide a narrative statement as his direct examination, that ECMC's counsel could then cross-examine him, and that Mr. Ayele could provide a further narrative statement in rebuttal. The only issue is whether Mr. Ayele sustained his burden of establishing that repayment of his student loan debt would impose an undue hardship upon him.

Mr. Ayele, a native Ethiopian, is a 53 year old. He is divorced and has no minor children. He filed a voluntary Chapter 7 petition on November 9, 2010. On Amended Schedule F, he listed unsecured creditors holding claims totaling $34,867.91, including ECMC with a claim in the sum of $29,925.42.
Mr. Ayele has lived in the United States for 29 years. During that time, he has not succeeded in obtaining salaried employment and has only held hourly wage positions. He currently resides in South Boston, Massachusetts in housing provided by the Boston Housing Authority for which he pays $405 per month. 

Mr. Ayele has acquired several degrees from American educational institutions.  Mr. Ayele has been collecting unemployment payments of $700 per month for the past nine months. Mr. Ayele testified that he has sent out over 600 resumes and job applications in his attempt to find employment suited to his educational level. He testified that his inability to find suitable employment was due to racism or his accent.  Mr. Ayele attempted to introduce written evidence pertaining to his medical conditions at trial. Specifically, he attempted to submit medical records that show that his gallbladder was removed and that he is physically unable to stand for extended periods of time due to a leg problem. Because of his physical limitations, Mr. Ayele maintained that he cannot apply for all types of jobs. ECMC objected to the admission of Mr. Ayele's medical and other evidence on the basis of hearsay and lack of authentication. The Court sustained its objection.

Mr. Ayele maintains that repayment of his student loan debt would present an undue hardship because he cannot currently afford to repay the debt, and he is unlikely to be able to repay it in the foreseeable future.  ECMC argues that Mr. Ayele failed to sustain his burden of establishing the existence of undue hardship. It asserts that Mr. Ayele failed to show that his future prospects are bleak enough to warrant the discharge of his student loan debt. It concludes that his request for an exception to discharge must be rejected in view of his right to consolidate his debts under the Ford Program.
This Court recently addressed the legal standards governing the discharge of student loan debt, extensively referencing the decision of the United States Bankruptcy Appellate Panel of the First Circuit in Bronsdon. Some courts have adopted the 3-part Bruner test while others have adopted the “totality of the circumstances” test.  The United States Court of Appeals for the First Circuit has not adopted either test. In Nash v. Conn. Student Loan Foundation (In re Nash), 446 F. 3.d 188, 190-91 (1st Cir. 2006), the First Circuit stated:  We see no need in this case to pronounce our views of a preferred method of identifying a case of "undue hardship." The standards urged on us by the parties both require the debtor to demonstrate that her disability will prevent her from working for the foreseeable future. Appellant has a formidable task, for Congress has made the judgment that the general purpose of the Bankruptcy Code to give honest debtors a fresh start does not automatically apply to student loan debtors. Rather, the interest in ensuring the continued viability of the student loan program takes precedence.

The United States Bankruptcy Appellate Panel for the First Circuit has adopted the "totality of the circumstances test." Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 801 (BAP 1st Cir. 2010). Regardless of whether this Court applies the Brunner test or the "totality of the circumstances test," the Court concludes that Mr. Ayele failed to satisfy his burden of establishing undue hardship as of the time of trial. The Court recognizes that Mr. Ayele's financial situation — especially the duration of unemployment compensation benefits, and the continuation of his existing expenses, coupled with his desire to provide for his sister's family — is not enviable. Were he to lose his unemployment compensation without obtaining employment, his financial position could become precarious. Were he to participate in the Ford Program, however, he would not be obligated to repay his student loan debt unless his prospects improved dramatically.

As noted in Stevenson, the Court agrees with those courts which have ruled that § 105(a) gives the bankruptcy court authority to fashion equitable relief in appropriate circumstances in student loan discharge cases. Like the Stevenson case, this case cries for a form of equitable relief.
OUTCOME:  Accordingly, the Court shall enter an order discharging any student loan debt Mr. Ayele is unable to repay following his participation in the Ford Program. If Mr. Ayele were to participate in the Ford Program and so inform the Court, and if he faithfully abides by the terms and provisions of either the IBR program or an ICR Plan, then the Court prospectively discharges any student loan debt which he may have at the expiration of the plan period so as to avoid any negative tax consequences.

363(b) sale order enforced, pre-empting Mass. law and thus precluding Mass. application of debtor’s rate experience upon buyer:

In re PBBPC, INC. (f/k/a BIOPURE CORPORATION), 2012 Bankr. LEXIS 726 (Bankr. D. Mass. 2/27/12)(Frank J. Bailey, Bankruptcy Judge).
PROCEDURAL POSTURE:  The buyer of the debtor's assets in a court-authorized sale free and clear of all interests under 11 U.S.C.S. § 363(b) and (f) moved for enforcement of the sale order against the Massachusetts Department of Workforce Development, Division of Unemployment Assistance (DUA), claiming that the sale order was free and clear of the debtor's experience rate and contribution rate as those terms were defined in Mass. Gen. Laws ch. 151A, § 14.
OVERVIEW:  The buyer contended that the DUA had been violating the § 363(f) features of the sale order by charging it for contributions to the state's unemployment compensation fund according to a rate that imputed to it certain attributes of the debtor resulting in a higher contribution rate than would otherwise obtain. The court held that the sale order did not have preclusive effect because the DUA had no actual notice of the sale motion. The court, however, held that the sale order preempted the application of successor status to the buyer under Mass. Gen. Laws ch. 151A, § 14, because the clear relationship between the DUA's right to tax according to the debtor's experience rating and the asset transfer on which that right was predicated made the DUA's right an interest within the meaning § 363(f). Where § 363(f) applied, it preempted any state law to the contrary.
OUTCOME:  The court found that the sale to the buyer pursuant to the sale order was free and clear of the debtor's experience rate and contribution rate.

Default judgment in adversary proceeding vacated, conditioned upon defendant’s payment of debtor’s counsel fees & costs:

(In re BOSTON CEI, LLC) BOSTON CEI, LLC v. VERTEC CORPORATION, 2012 Bankr. LEXIS 580 (Bankr. D. Mass. 2/6/12)(Joan N. Feeney, Bankruptcy Judge).
PROCEDURAL POSTURE: Defendant creditor filed an emergency motion to vacate default judgment 13 months after the default. Plaintiff chapter 11 debtor opposed the motion. The debtor had obtained a default judgment for damages and turnover of $233,100.56 for alleged breaches of contract and quantum meruit, based on outstanding invoices.
OVERVIEW: Creditor had not filed a proof of claim in the debtor's bankruptcy case, and the deadline for doing so had passed. In seeking to vacate the default judgment, creditor relied upon Fed. R. Bankr. P. 7055, which made Fed. R. Civ. P. 55(c) and 60(b) applicable to the adversary case. Creditor had been properly served, but relied on the erroneous opinion of its counsel that the federal court, like the Connecticut courts, would set aside the default if the creditor filed a tardy answer. The court found that the creditor was justified in attempting to limit its exposure for the debtor's breach of contract and quantum meruit claims. Any relief however, was conditioned upon the payment of the debtor's legal fees incurred associated with the emergency motion to vacate the default judgment.
OUTCOME: The creditor's motion to vacate was granted, on the condition that debtor's legal fees incurred in the adversary proceeding be paid by the creditor.

Severance pay denied administrative priority expense status as claims were unrelated to salary and length of service:

2012 Bankr. LEXIS 459 (Bankr. D. Mass. 2/13/12)(Melvin S. Hoffman, Bankruptcy Judge).
PROCEDURAL POSTURE: Former employees who were senior executives of a Chapter 11 debtor filed motions seeking allowance of administrative expense claims under 11 U.S.C.S. § 503(b)(1) for severance pay due them under the debtor’s executive severance policy.
OVERVIEW: The employees were both in good standing when the debtor and certain affiliates filed voluntary petitions under Chapter 11. As part of an asset purchase agreement between a buyer and the debtor, the buyer agreed to offer employment to the debtor’s employees and in the event buyer terminated any former employee of the debtor, the buyer agreed to honor any severance obligation based on debtor’s severance policy. The buyer did not offer employment to the employees. The court concluded that the severance claims were not entitled to priority status as expenses of administration of the chapter 11 case because those claims were unrelated to their salaries and length of service. The employees’ motions also asserted that the buyer violated the terms of the agreement by not offering them employment post-closing, and the court set the motions for further hearing on that issue.
OUTCOME: The court denied the employees' request for administrative expense status.

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