Recent Bankruptcy related decisions in the 1st Circuit in April 2012, Part 2 of 4.

Bankruptcy Court should not have abstained in a core proceeding:

(IN RE: MEDICAL EDUCATIONAL & HEALTH SERVICES, INC.), SISTEMAS INTEGRADOS DE SALUD DEL SUROESTE, INC.; MAYAGUEZ MEDICAL CENTER DR. RAMON EMETERIO BETANCES, INC., Appellant(s), v. MEDICAL EDUCATIONAL & HEALTH SERVICES, INC., Appellee(s), U.S. TRUSTEE.,  2012 U.S. Dist. LEXIS 46584 (D. P. R. 3/31/12)(D. R. Dominguez, District Judge).

SUMMARY: The court held that a debtor's claim for breach of a lease agreement was a core proceeding under 28 U.S.C.S. § 157(b)(2) because the breach of contract claim directly affected the administration of the debtor's estate given that the debtor claimed that the lease agreement constituted the main asset of its bankruptcy estate. Because the removed state court proceeding was a core proceeding, the bankruptcy court erred by abstaining from entertaining the removed proceeding pursuant to the mandatory abstention provision in 28 U.S.C.S. § 1334(c)(2).
OUTCOME: The court remanded the matter to the bankruptcy court for further proceedings.

Bankruptcy Court undertook fraudulent transfer adversary proceeding, cautioning as to its decision being issued in light of Stern v. Marshall:

(In re MILLER)MILLER v. GROSSO, 2012 Bankr. LEXIS 1352 (Bankr. D. Mass. March 30, 2012)(Frank J. Bailey, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff debtor brought an adversary complaint asserting counts for avoidance of fraudulent transfers under 11 U.S.C.S. § 548(a)(1)(B), for turnover of real property under 11 U.S.C.S. § 542, and for recovery and preservation for the estate pursuant to 11 U.S.C.S. §§ 550 and 551.
OVERVIEW: The court considered whether it could enter final orders as to the fraudulent transfers and related issues under the recent U.S. Supreme Court decision of Stern v. Marshall. Although defendant transferee consented to the bankruptcy judge's entering final judgment in the matter, the court found that it might be limited to making findings of fact as to noncore proceedings, subject entry of final judgment by the district court after review pursuant to 28 U.S.C.S. § 157(c)(1), if a reviewing court ultimately determines that the bankruptcy court did not have authority to enter final judgment. Also, if the district court's reference was withdrawn and the matter tried in that court, the issue of authority would be moot.
OUTCOME: To the extent the court could not enter final orders on any noncore issue, it would make findings of fact for the district court's determination.

The complaint in this proceeding asserts four counts for avoidance of fraudulent transfers under 11 U.S.C. § 548(a)(1)(B). When the complaint was filed, the bankruptcy court's authority to enter final judgment as to these counts was unquestioned. With its opinion in Stern v. Marshall,     U.S.   , 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), the Supreme Court placed that authority in question. The Court therefore asked the parties  [*2] to address several issues: (i) whether the various counts in this adversary proceeding are or may be treated as core proceedings; (ii) whether, if they are core proceedings, the Supreme Court's decision in Stern nonetheless prohibits their assignment to a bankruptcy judge for final adjudication; and (iii) whether, if the counts are core but may not be assigned to a bankruptcy judge for final adjudication, they nonetheless consent to the bankruptcy judge's entering final judgment in the matter.

Debtor could not amend exemptions to take advantage of Chapter 7 trustee’s avoidance of mortgage because the debtor’s grant of the security interest (mortgage) was voluntary, even though a failure to record the mortgage rendered the mortgage invalid, and the debtors could only claim the increased exemption after avoidance of the mortgage if the transfer of the security interest was involuntary:

IN RE: JOAQUIN ACEVEDO VARGAS, ANGELITA FELICIANO CONCEPCION, 2012 Bankr. LEXIS 1701 (Bankr. D.P.R. April 17, 2012)(Enrique S. Lamoutte, Bankruptcy Judge).

PROCEDURAL POSTURE: After a bankruptcy trustee avoided a mortgage lien against bankruptcy debtors' real property, the debtors moved to amend their schedule of exemptions to claim an increased exemption in the property. The trustee opposed the proposed amendment.
OVERVIEW: The trustee contended that the amended exemption in the real property was untimely claimed after the trustee avoided the mortgage lien, and that the debtors were precluded by 11 U.S.C.S. § 522(g) from claiming an exemption in the property after avoidance of the debtor's voluntary grant of the mortgage lien. The bankruptcy court held that, while the amended exemption was timely claimed by the debtors before the debtors' case was closed, the debtors could not claim an increased exemption in the property based on the trustee's avoidance of the mortgage lien for the benefit of the bankruptcy estate. The debtors' grant of the mortgage against the property was voluntary, even though a failure to record the mortgage rendered the mortgage invalid, and the debtors could only claim the increased exemption after avoidance of the mortgage if the transfer of the security interest was involuntary.
OUTCOME: The debtors' motion to amend their exemption schedule was denied.

Bankruptcy Court denies Chapter 7 debtors application to reopen cases to schedule a non-disclosed asset the debtors wishes to pursue (cause of action against car lender) due to grounds of judicial estoppels, and that an undisclosed asset is subject to the rights of the Chapter 7 trustee to pursue; court indicated outcome was different in Chapter 13 debtor’s case:Top of Form

IN RE: CLAUDIO, Debtor; IN RE: RIVERA, 2012 Bankr. LEXIS 1325 (Bankr. D.P. R. March 28, 2012)(Enrique S. Lamoutte, Bankruptcy Judge).

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. 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. § 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) 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.
When a debtor moves to reopen a case to include an undisclosed asset the most important consideration is the benefit to creditors. In re Arana, 456 B.R. 161, 173 (Bankr. E.D. New York 2011).
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 (chapter 7) trustee.
CONCLUSION:  Debtors' motions to reopen their respective cases are hereby denied.

Bankruptcy Court declined to abstain, discussing permissive vs. mandatory abstention, in this non-core related to jurisdictional adversary proceeding, and would enter proposed findings subject to the District Court’s review, deferring decision on summary judgment until it was determined if the school district was part of the city; Declaratory Relief appropriate in bankruptcy cases;

(In re CITY OF CENTRAL FALLS, RHODE ISLAND [ Chapter 9]) CITY OF CENTRAL FALLS, RHODE ISLAND v. CENTRAL FALLS TEACHERS' UNION, RHODE ISLAND COUNCIL 94, AFSCME, AFL-CIO LOCAL 1627, et al.,

2012 Bankr. LEXIS 1718 (Bankr. D.R.I. March 23, 2012)(Frank J. Bailey, Bankruptcy Judge, Sitting).

PROCEDURAL POSTURE: Plaintiff, the state-appointed receiver of a city, sought a declaration that a school district was part of the city and, therefore, the collective bargaining process was within the bankruptcy court's subject-matter jurisdiction, and that the receiver had the power under state law to act on behalf of the city relative to collective bargaining with defendant unions. The unions moved to dismiss or abstain and the receiver moved for summary judgment.
OVERVIEW: The city filed for protection under Chapter 9 of the Bankruptcy Code. The unions were parties to a collective bargaining agreement with the school district that ran the schools in the city. The court held that both counts presented an actual controversy with the unions that warranted declaratory relief. The court held that the receiver's requests were not core and that the bankruptcy court was unable to enter a final judgment in the matter. However, because the matters were related to the bankruptcy case, the court retained authority to hear and enter proposed findings and conclusions in the matter. The court held that abstention was not mandatory because the matters could not be timely adjudicated in a state forum of appropriate jurisdiction. Nor was discretionary abstention appropriate because of the importance of the issues to the bankruptcy case and the need for expedition. The court held that the school district was not part of the city because a 2007 amendment to the city charter deleted the words "school committee" from § 3-100(c). The deletion disestablished the school committee and left no board or agency through which the city could control the schools.
OUTCOME: The court denied the unions' motion to dismiss or abstain. Declaratory relief may be entertained by the bankruptcy court. The court denied the receiver's motion for summary judgment as to the first count and deferred a decision on the second count. Bankruptcy Court has authority, regardless as to consent of parties, to determine core proceedings.  If non-core, the bankruptcy court may hear the matter but submit proposed findings to the District Court.

Term "core proceeding" is used in 28 U.S.C.S. § 157(b) to refer to those matters a bankruptcy judge may hear, determine, and dispose of by appropriate orders and judgments, subject only to appellate review. Section 157(b) provides a non-exhaustive list of core proceedings, including two catch-all categories: matters concerning the administration of the estate, § 157(b)(2)(A), and other proceedings affecting the adjustment of the debtor-creditor relationship, § 157(b)(2)(O). The first of these, "matters concerning the administration of the estate," cannot apply in a Chapter 9 case because Chapter 9 cases involve no estate. Section 157 does not otherwise define "core proceeding" except by dictating that a determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law. 28 U.S.C.S. § 157(b)(3). It is the nature of the proceeding--its relation to the basic function of the bankruptcy court--not the state or federal basis for the claim, that makes the difference here. The legislative history of 28 U.S.C.S. § 157 indicates that Congress intended that core proceedings would be interpreted broadly, close to or congruent with constitutional limits.  

Mandatory abstention: 28 U.S.C.S. § 1334(c)(2) applies by its terms to a district court exercising bankruptcy jurisdiction under § 1334 and, by operation of 28 U.S.C.S. §§ 151 and 157(a), to a bankruptcy court acting upon a bankruptcy matter by reference under § 157(a). Section 1334(c)(2) mandates that a court abstain if five conditions are satisfied: (1) the proceeding is based on a state law claim or cause of action; (2) the claim or cause of action is related to a case under title 11 but does not arise under title 11 and does not arise in a case under title 11; (3) federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case; (4) an action "is commenced" in a state forum of appropriate jurisdiction; and (5) the action can be timely adjudicated in that state forum.

Permissive abstention: Where abstention is not mandatory under 28 U.S.C.S. § 1334(c)(2), subsection (c)(1) nonetheless permits a court to abstain from hearing a matter related to a bankruptcy case in the interest of justice or in the interest of comity with State courts or respect for State law. 28 U.S.C.S. § 1334(c)(1). Courts have developed a comprehensive list of the relevant considerations for discretionary abstention under 28 U.S.C.S. § 1334(c)(1): (1) the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable law, (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court, (5) the jurisdictional basis, if any, other than § 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than form of an asserted "core" proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court, (9) the burden of the bankruptcy court's docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial, and (12) the presence in the proceeding of nondebtor parties. Courts should apply these factors flexibly, for their relevance and importance will vary with the particular circumstances of each case, and no one factor is necessarily determinative. 

This adversary proceeding arises in the bankruptcy case of the City of Central Falls, Rhode Island (the "City"), a proceeding for adjustment of debts of a municipality under chapter 9 of the Bankruptcy Code. The plaintiff is Robert G. Flanders, Jr. (the "Receiver") in his capacity as the state-appointed receiver of the City. The principal defendants are two labor unions, the Central Falls Teachers Union, Local 1657 of the American Federation of Teachers (the "Teachers' Union") and Local 1627, Rhode Island Council 94, AFSCME, AFL-CIO ("Council 94") (jointly, the "Unions"). Each is party to a collective bargaining agreement with the Central Falls School District (the "School District"), which—suffice it to say for now—runs the public schools in Central Falls. As part of his efforts to fashion a feasible and comprehensive plan of debt adjustment in this bankruptcy case, the Receiver has been renegotiating the CBAs with the Unions, but his efforts have been impeded by uncertainty over two issues: (i) whether the School District is part of the City, such that the debts and contract obligations of the School District are obligations of the City and therefore subject to adjustment in this bankruptcy case; and (ii) whether the Receiver, acting on behalf of the City, has the power under Rhode Island's Fiscal Stability Act, the statute defining his powers as receiver, to collectively bargain with the Unions. By his complaint in this adversary proceeding, the Receiver seeks a declaratory judgment resolving both issues in the affirmative, and he has now moved for summary judgment to that effect. In response, the Teachers' Union has moved to dismiss for lack of subject matter jurisdiction or to abstain; and, on the merits, both Unions have opposed summary judgment and urged resolution of the Receiver's issues in the negative. In view of the need to avoid significant delays in the reorganization process, the Court heard both motions on an expedited basis and now addresses them in this memorandum of decision.

The material facts are not in controversy, but on the factual record established by this motion, the Receiver is not entitled to judgment as a matter of law. Rather, on the governing law, it appears that judgment should enter against the Receiver with a declaration that the School District is not part of the City. Rule 56(f)(1)now expressly permits a court to grant summary judgment for a nonmovant, but only "after giving notice and a reasonable time to respond." The Court will hold a status conference to determine whether judgment should enter against the Receiver or, in the alternative, whether this adversary proceeding should proceed to trial, as provisionally scheduled. The Receiver's second count is dependent on the outcome of the first. Upon a final determination that the School District is not part of the City, the second would be moot. Entry of this decision should not be delayed for a merely academic consideration of that issue. Therefore, as to Count Two, the court will hold the Motion for Summary Judgment in abeyance pending a determination as to whether summary judgment will enter against the Receiver on Count One. If that event, the court would enter an order deeming Count Two moot.

ORDER:  For the reasons set forth above, the court hereby ORDERS as follows:

1. The Cross-Motion of the Teachers' Union to Dismiss or Abstain is DENIED.
2. The two counts in this proceeding are non-core matters that are otherwise related to the City's bankruptcy case. Under 28 U.S.C. § 157(c)(1), this court will hear the adversary proceeding and, at the conclusion, enter proposed findings of fact and conclusions of law, subject to review and entry of final judgment by the district court as specified in § 157(c)(1) and related rules.
3. As to Count One, the Receiver's Motion for Summary Judgment is DENIED, and the court will schedule a hearing to determine whether, under Fed. R. Civ. P. 56(f)(1), the court should grant summary judgment for the Unions.

District Court reverses Bankruptcy Court, finding that the statute of frauds in Mass., as per case law,  does not apply to oral agreements as to the disposition of proceeds from sale of land:

KILLIAN v. BRAUNSTEIN, 2012 U.S. Dist. LEXIS 44617 (D. Mass. March 30, 2012)(Nathaniel M. Gorton, District Judge).

Summary judgment entered by Bankruptcy court was appealed.  Appellant contends that the Bankruptcy Judge erred in determining that the statute of frauds required the alleged oral agreement between the parties to be in writing when that agreement concerned the disposition of proceeds from the sale of the Property rather than the sale itself.

The fourth clause of the Statute of Frauds in Massachusetts provides that any "contract for the sale of lands, tenements or hereditaments or of any interest in or concerning them" must be in writing to be enforceable. The applicability of that clause hinges on a determination of what is, and what is not, an "interest" in lands, tenements or hereditaments.  

Massachusetts case law makes clear that the clause does not apply to "an agreement to share proceeds from the sale of land".  The oft-cited case is Reum v. Brazeau, in which the Massachusetts Court of Appeals considered a Statute of Frauds defense to an oral agreement between a divorced couple that, when and if their former home was sold, they would share equally in the proceeds. The court concluded that the oral agreement was enforceable because it concerned "merely personalty, that is, the proceeds of any prospective sale of the property," and thus did not qualify as a contract "for the sale of lands, tenements or hereditaments or of any interest concerning them".

The agreement, if proven, was a conditional promise from David and Celia to Michael, with performance due upon sale of the Property, that could reasonably have been expected to induce forbearance on the part of Michael. It concerned distribution of proceeds from the prospective sale of the Property, rather than the sale itself, and thus was not subject to the statute of frauds.

The Court therefore concludes that the Bankruptcy Court erred to the extent it allowed summary judgment based upon a determination that any oral agreement between David, Michael and Celia with respect to the proceeds of the sale of the Property was unenforceable because it pertained to the sale of an hereditament. Furthermore, although the Trustee maintains that Michael has offered no evidence of the oral agreement, this Court disagrees. Viewing the record in a light most favorable to the non-moving party, as required with respect to a motion for summary judgment, the Court finds that the deposition testimony of Michael and David, together with their conduct at the time of the sale of the Property (dividing the proceeds so that they ended up with equal shares of the mortgage and sales proceeds), is enough to raise a genuine issue of material fact as to whether a binding oral contract existed.

Reversed:  Accordingly, the Court will vacate the entry of summary judgment as to Count I and remand the case to the Bankruptcy Court for further proceedings consistent with this opinion. Further consideration of whether the alleged oral contract was prohibited by the spendthrift provision is also in order, given that Celia, as Trustee and under the terms of the Trust as paraphrased, was vested with

absolute and complete authority over the property of the Trust and could pledge, mortgage or loan Trust property at her discretion; lend money at such terms and on such security as she deemed best; and do such other acts which may be allied with or for the best interest of the Trust.

Motion to dismiss Chapter 11 case under “bad faith” denied, where grounds asserted for bad faith rested on lack of appropriate licensure, and debtor showed it believed it had the correct licenses:

IN RE: HOSPITAL DE DAMAS, INC., 2012 Bankr. LEXIS 1562 (Bankr. D.P.R. April 9, 2012)( Edward A. Godoy, Bankruptcy Judge).

PROCEDURAL POSTURE: Certain creditors (medical malpractice claimants) filed a motion to dismiss a Chapter 11 debtor’s case under 11 U.S.C.S. § 1112(b), alleging that the debtor was operating a hospital without a license and that its operation of the hospital was illegal and unlawful. The medical malpractice claimants also alleged that the debtor’s bad faith warranted dismissal. Other medical malpractice claimants joined in the motion.
OVERVIEW: The medical malpractice claimants alleged that the debtor’s bad faith arose from misrepresentations in documents stating that it was legally operating a hospital when in fact it did not have a license to operate a hospital issued by the Puerto Rico Department of Health (PRDOH). Prior to 1987, a not-for-profit corporation operated the hospital. In 1987, it incorporated the debtor and leased the hospital facility to the debtor. The claimants failed to establish the debtor’s lack of good faith and, by extension, that the debtor committed fraud. The evidence established that the debtor operated the hospital facility under a certificate of need and convenience (CNC) and license issued to the not-for-profit corporation. The court found that it was reasonable to infer that the debtor inadvertently failed to realize that there was a problem with its CNCs and licenses prior to the filing of the motion to dismiss. In making this finding, the court took into consideration the facts that the PRDOH had known, at least since 2001, that the debtor was operating and administering the hospital and that the PRDOH had itself been inconsistent in the issuance of licenses to operate the hospital.
OUTCOME: The court denied the motion to dismiss.

Personal injury settlement money was not property of the Chapter 7 estate; case began as Chapter 13 and the damages suffered occurred more than 180 days after the Chapter 13 case was filed and before the case was converted to Chapter 7; Debtor’s motion granted to deem the 341(a) meeting closed when Trustee adjourned it “sine die”;

IN RE:RAMON, 2012 Bankr. LEXIS 1720 (Bankr. D.P.R. April 17, 2012)( Enrique S. Lamoutte, Bankruptcy Judge).

PROCEDURAL POSTURE: There were two interrelated matters pending before the court. The first was the Chapter 7 trustee's objection to debtor's claim of exemptions and debtor's opposition thereto. The second was debtor's opposition to the "trustee's sine die continuance and request to deem § 341 meeting closed." The motion to deem the 11 U.S.C.S. § 341 meeting closed stood unopposed.
OVERVIEW: The Trustee objected to the amended claim of exemptions filed by debtor over an undisclosed post petition extrajudicial personal injury settlement. The trustee alleged, inter alia, that the exemption over the attorney's fees in the amount of $4,000 exceeded the amounts allowed under 11 U.S.C.S. § 522(d)(5). Initially, the court denied debtor's request to find that the objection to exemptions was filed late, and proceeded to consider the merits of the objection. What was property of the estate in this case converted from chapter 13 to chapter 7 was whatever was property of the estate as of petition date, i.e., March 3, 2008. The determination hinged on 11 U.S.C.S. § 541 and not the expanded provisions of 11 U.S.C.S. § 1306. The damages were suffered on April 12, 2010, well after 180 days after petition date. Therefore, the same were not property of the chapter 7 estate; 11 U.S.C.S. § 541(a)(5). The settlement amounts were also received after 180 days from petition date. Consequently, the same were not property of the chapter 7 estate, and there was no need to claim as exempt the settlement amounts because the same were not property of the estate.
OUTCOME: The Chapter 7 trustee's objection to exemptions was denied. The court granted debtor's request to deem the 11 U.S.C.S. § 341 meeting closed as of September 13, 2011.