Monday, June 11, 2012

Recent Bankruptcy Decisions within the First Circuit: May 2012 (Part 1 of 4).

Where Bankruptcy Court lacked jurisdiction to adjudicate fraudulent transfer issues (Stern v. Marshall), the proper mechanism to move it to the District Court is by way of a litigant’s motion for withdrawal of the reference, not a sua sponte transfer.

DE JESUS-GONZALEZ, et al., Appellants, v. SEGARRA-MIRANDA, WILFREDO, Appellee, 2012 U.S. Dist.LEXIS 72921 (D.P. R. 5/25/12)(Gustavo A. Gelpi, District Judge).              OPINION AND ORDER: Presently before the court is the appeal by Sitka Enterprises, Inc., Berrios & Longo Law Offices, P.S.C., and Fernando E. Longo-Quinones ("Appellants") of an order issued by the United States Bankruptcy Court for the District of Puerto Rico transferring Adversary Case No. 09-150 (BKT), to the U.S. District Court. The issue on appeal is whether the bankruptcy court acted within its power when it transferred the case to the district court.  Appellants argue the bankruptcy court should have dismissed the case. The bankruptcy court denied Appellants motion to dismiss. Appellants argue the district court's order in Civil No. 10-1847 (CCC) required all claims to be dismissed for lack of jurisdiction. Trustee argues the district court merely held the bankruptcy court could not adjudicate the fraudulent conveyance claim, but refrained from ruling on the jurisdiction as to the rest of the claims or whether the bankruptcy court must dismiss the fraudulent conveyance claim.  While the bankruptcy court could not adjudicate the fraudulent conveyance claim, other options remained open to the court and the parties. Accordingly, this court does not find the bankruptcy court acted in direct violation of the district court's order by not dismissing all claims. The court cannot find any mechanism that would allow the bankruptcy court to transfer a case from its docket to the district court. The bankruptcy court does not have the power to transfer cases. A withdrawal of reference motion allows the district court to ensure only those cases requiring adjudication in the district court are transferred. Allowing the bankruptcy court to transfer cases to the district court sua sponte would run contrary to the statutory powers given to the bankruptcy court by Congress. There are no inherent powers of the bankruptcy court that would allow such transfers in the absence of a statutory grant. This court finds the proper mechanism for transferring a case is by motion to withdraw the reference.   As such, the court GRANTS Appellants' appeal as to the inability of the bankruptcy court to transfer the case to the district court and DENIES Appellants' arguments that the only course of action for the bankruptcy court is full dismissal of all claims. The case is hereby REMANDED for further adjudication in compliance with this ruling.

Strict timeliness standard applied to Maine cases where withdrawal of the reference sought:

WILLIAM H. HOWISON, Plaintiff, v. MILO ENTERPRISES, INC., Defendant, v. FREAKY BEAN COFFEE COMPANY, Debtor, 2012 U.S. Dist. LEXIS 70308 (D. Maine 5/21/12)(John A. Woodcock, Jr. District Judge).
OVERVIEW: Plaintiff trustee filed an adversary proceeding to avoid allegedly preferential transfers under 11 U.S.C.S. § 547. Defendant moved to withdraw the reference under 11 U.S.C.S. § 157(d). The court denied defendant's motion on timeliness grounds. The court concluded that defendant did not act as soon as practicable so as to protect the court and the parties in interest from useless costs and disarrangement of the calendar, and to prevent unnecessary delay. Courts in the U.S. District Court for the District of Maine applied an unforgiving standard to the timeliness requirement.
OUTCOME: Motion to withdraw denied.
As a result of extensive briefing and a hearing, the Bankruptcy Court obtained a comprehensive understanding of the factual and legal issues in this case and on June 9, 2011, the Bankruptcy Court denied the cross-motions for summary judgment. On June 23, 2011, the United States Supreme Court issued its decision in Stern v. Marshall. On August 30, 2011, the parties held a final pretrial conference in the Bankruptcy Court and at the conference, defense counsel raised the issue of the Bankruptcy Court's constitutional authority to enter final orders in the adversary proceeding given the recent Stern decision.

Noting that section 157(d) allows the district court to order a proceeding withdrawn from a bankruptcy court "for cause shown," Milo moves for permissive, not mandatory withdrawal. Milo says that district courts have generally applied six criteria to determine whether to withdraw a reference: (1) judicial economy; (2) uniformity of bankruptcy administration; (3) reduction of forum shopping and confusion; (4) conservation of debtor and creditor resources; (5) expedition of the bankruptcy process; and (6) whether a jury trial has been requested. Milo contends that the lack of constitutional authority of the Bankruptcy Court to proceed would constitute additional "cause" for withdrawal of the reference. Milo points out that under Stern a key question is whether the issues in the Bankruptcy Court proceeding were "core" or "non-core" under § 157(b) and that Stern changes the inquiry because some "core" matters—including, Milo says, this one—cannot be constitutionally adjudicated by the Bankruptcy Court. Milo submits that because it has not filed a proof of claim against the Debtor's estate, the answer "when viewed through the lens of Stern and its predecessors, is clearly no."

The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown.  28 U.S.C. § 157(d).  Movant "bears the burden of demonstrating cause."  Section 157(d) does not define "cause" and the First Circuit has not interpreted the term; nevertheless, "courts in this District balance a variety of factors, including judicial economy, whether withdrawal would promote uniformity of bankruptcy administration, reduction of forum shopping and confusion, conservation of debtor and creditor resources, expedition of the bankruptcy process, and whether a jury trial has been requested. The moving party also bears the burden of demonstrating the timeliness of its motion. The standard for timeliness is whether the motion was filed "as promptly as possible in light of the developments in the bankruptcy proceeding," or "at the first reasonable opportunity." Timeliness is assessed from the time a complaint is filed or from the time the grounds for withdrawing the complaint first become apparent." Also, timeliness must be "measured by the stage of the proceedings in the bankruptcy court." In other words, "[a]s a bankruptcy proceeding becomes more developed, complicated, and involved, a court is more likely to find a motion untimely." Id. As this District has observed, timeliness may be even more essential in bankruptcy matters than in other types of cases because "time is money, and the passage of time can have a detrimental impact on the bankruptcy court's ability to manage a successful outcome to the proceedings."

Ordinarily, a motion to withdraw the reference filed eighteen months after a complaint and after cross-motions for summary judgment were filed and resolved would not be timely. However, here, Milo argues that the time should run not from March 2010, but from June 23, 2011, when the Supreme Court decided Stern. Milo's point has salience only to the extent the Stern Court declared new law that Milo should not have anticipated. The Court concludes, however, that Milo should have raised the withdrawal issue before Stern was decided and that its petition for withdrawal is untimely.

Involuntary Ch. 11 filed against debtor did not have the required three creditors; however, evidentiary hearing set to determine if the “special circumstances” provision applied, and whether debtor was not paying his debts as they became due:

IN RE: Colon, 2012 Bankr. LEXIS 2347 (Bankr. D.P.R. 5/22/12)(Enrique S. Lamoutte, Bankruptcy Judge).
PROCEDURAL POSTURE: Creditor bank filed an involuntary bankruptcy petition under 11 U.S.C.S. § 303 which sought an order requiring an individual debtor to undergo Chapter 11 bankruptcy, and creditor auto company joined the bank's petition. The bankruptcy court dismissed the creditors' petition; however, the U.S. Bankruptcy Appellate Panel for the First Circuit reversed the bankruptcy court's decision and remanded the case. The debtor moved for summary judgment.
OVERVIEW: The petitioning creditors, a bank and an auto company, claimed that the debtor owed them debts and was not paying his debts, and they asked the court to issue an order that placed the debtor into Chapter 11 bankruptcy. The debtor claimed that the creditors' petition had to be dismissed under 11 U.S.C.S. § 303(b) because it was filed by less than three creditors, and under § 303(h) because there was no evidence he was not paying his bona fide debts as they came due. The court found that the debtor owed debts to fifteen different creditors on the petition date and was entitled to summary judgment on his claim that he had at least twelve creditors. That fact alone was not sufficient to warrant dismissal of the creditors' petition, however, because the requirement in § 303(b) that an involuntary bankruptcy case be filed by at least three creditors in cases where a debtor owed bona fide debts to at least twelve creditors was subject to a "special circumstances exception" that applied in cases where a debtor committed fraud, artifice, or a scam. The evidence presented to the court was not sufficient, however, for it to determine if the special circumstances exception applied.
OUTCOME: The court granted the debtor's motion for summary judgment on his claim that he owed bona fide debts to at least twelve creditors on the petition date, and scheduled an evidentiary hearing to consider two issues: whether there were special circumstances compelling the court to obviate the three-creditor requirement in 11 U.S.C.S. § 303(b) and whether the debtor was not paying his debts as they came due.

BAP affirms dismissal of Ch. 11 case; pro se debtor has no constitutional right to counsel in the case:

ÁNGEL LUIS COLÓN MARTINEZ, a/k/a Ángel L. Colón Martinez, Debtor. ÁNGEL LUIS COLÓN MARTINEZ, Appellant, 2012 Bankr. LEXIS 2182 (1st Cir. BAP 5/14/12)(Before Bankruptcy Judges Boroff, Deasy and Bailey, Opinion by Judge Boroff).
PROCEDURAL POSTURE: Appellant debtor challenged an order of the U.S. Bankruptcy Court for the District of Puerto Rico which dismissed his chapter 11 case and disqualified him from filing a new case for 180 days pursuant to 11 U.S.C.S. § 109(g).
OVERVIEW: There was no U.S. Const. amend. VI right to counsel in civil cases. Thus, debtor's argument that he was deprived of his purported "right to counsel" was based on a faulty premise. Next, in the absence of timely, complete financial disclosures and compliance with court orders, the bankruptcy court did not abuse its discretion in determining that dismissal was in the best interests of creditors. Moving on, the court stated that although debtor received the benefit of several extensions during this time period, the Plan and Disclosure Statement which he eventually filed were both untimely and inadequate. He then ignored the Order to Show Cause. By his accumulated omissions, he delayed the proceedings and neglected to take advantage of the Bankruptcy Code's protection and the bankruptcy court's repeated continuances. The record amply supported a determination that there existed sufficient cause for dismissal or conversion under 11 U.S.C.S. § 1112(b)(3), (b)(4)(E), (b)(4)(F). Next, regarding 11 U.S.C.S. § 109(g), the court found that an inference of willfulness (as to the failure of debtor to abide by orders of the court) was justified.
OUTCOME: The Order was affirmed.
2012 U.S. Dist. LEXIS 62354, *

District Court affirms Bankruptcy Court’s approval of City’s rejection of employment contract:

JOSEPH P. MORAN, III v. CITY OF CENTRAL FALLS, 2012 U.S. Dist. LEXIS 62354 (D.R. I. 5/4/12)(Mary M. Lisi, District Judge).
OVERVIEW: Pursuant to 11 U.S.C.S. § 365(a), the bankruptcy court authorized a receiver for a city to reject an employment contract between the city and a police official. The court held that the receiver's decision to reject the executory contract was within the receiver's business judgment because the official's compensation and benefits under the contract were significantly more favorable than those provided to other city employees and the contract constituted a significant financial burden on the city and presented difficulties for the city in restructuring fiscal obligations fairly and consistently.
OUTCOME: The court affirmed the bankruptcy court's decision.

BAP affirms that two of three appeals from orders were untimely i.e. where appellant filed successive post-judgment motions, time for appeal ran from denial of the first motion;
As for timely appeal, it was denied as failing to sustain the basis for a motion for reconsideration i.e. reconsideration is not a vehicle to re-litigate the case or raise new argument that could have been previously raised;
The ultimate issue was that the debtor was entitled to cost/fees of defending against a baseless discharge complaint:

(In re VÁZQUEZ) BANCO BILBAO VIZCAYA ARGENTARIA PUERTO RICO v. VÁZQUEZ, 2012 Bankr. LEXIS 2408 (1st Cir. BAP 5/25/12)(Before Bankruptcy Judges Boroff, Deasy and Bailey, Opinion by Judge Bailey).
PROCEDURAL POSTURE: In two consolidated appeals, appellant creditor sought review of three bankruptcy court orders from the United States Bankruptcy Court for the District of Puerto Rico, which granted appellee Chapter 7 debtor’s motion for fees and costs (the fee order), denied the creditor’s motion for an extension of time to file a surreply to the fee motion (surreply order), and denied its motion to amend the fee order (the reconsideration order).
OVERVIEW: The panel found that the fee order and surreply orders were final orders even though the court did not issue a judgment. The creditor contended that its appeal from those orders was timely under Fed. R. Bankr. P. 8002(b)(1) because the deadline to appeal was tolled first by its Fed. R. Bankr. P. 7052 motion and then by its motion to amend judgment. The panel disagreed, holding that where there were successive postjudgment motions, only the first such motion tolled the time period for filing a notice of appeal with respect to the underlying judgment. In the motion to amend judgment, the creditor requested an amendment of the fee order permitting it to satisfy the order by setoff and reconsideration of the fee order itself. The bankruptcy court did not abuse its discretion in denying the motion, as the creditor could not use Fed. R. Civ. P. 59(e) to advance arguments that it could have made earlier. Notwithstanding the court’s denial of the creditor’s motion for an extension of time to file a surreply, the creditor had two previous opportunities to raise the arguments that it made for the first time in its motion to amend judgment.
OUTCOME: The panel dismissed the appeal from the fee and surreply orders as untimely and affirmed the reconsideration order.
Discussion: BBVA filed a complaint seeking a denial of the Debtor's discharge (the "Complaint") pursuant to § 727(a)(7)1 (authorizing denial of discharge where "the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider"). In the Complaint, BBVA explained that the Debtor is the former president and principal stockholder of J&B Enterprises Inc. ("J&B"), which operated a beauty spa. BBVA financed J&B's acquisition of spa equipment via a loan of $345,080, secured by a lien on the equipment. J&B filed a petition for relief under chapter 7 of the Bankruptcy Code in 2005. The chapter 7 trustee in that case abandoned the spa equipment in 2006, and in that same year that case was closed. From 2005 through 2007, BBVA contended, it unsuccessfully attempted to recover the spa equipment. BBVA alleged that the Debtor, as an insider of J&B and with intent to hinder, delay, or defraud BBVA, transferred, removed, destroyed, mutilated or concealed the spa equipment after J&B filed for bankruptcy relief and thereby committed an act specified in § 727(a)(2) in the J&B case, warranting denial of his discharge in this, his own bankruptcy case.

Debtor filed a motion to dismiss the Complaint (the "Dismissal Motion") for failure to state a claim on which relief could be granted. He argued that the Complaint failed to state a claim on which relief could be granted because, on the facts alleged — specifically, that the J&B trustee abandoned the J&B property in 2006, and that the J&B case was closed in 2006 — the Debtor cannot have committed an act specified in § 727(a)(2) in the J&B case on or within one year before March 3, 2009, the date of the filing of the Debtor's bankruptcy petition: at no time in the year before March 3, 2009, did the J&B property remain property of the J&B bankruptcy estate. At the conclusion of the Dismissal Motion, the Debtor requested that the Complaint be dismissed and that costs and attorney's fees be imposed for bringing the Complaint against the Debtor.  Initially, BBVA moved for a one-week extension of time to respond to the Dismissal Motion because it was exploring settlement. The court extended the response deadline as requested, but BBVA never filed a response. On March 7, 2011, the court entered a two-sentence order that granted the Dismissal Motion and ordered the Debtor's attorney to "file a motion stating his attorney's fees and costs." BBVA has not appealed from the order dismissing the Complaint and does not challenge its propriety.

In accordance with the court's order, Debtor filed a motion for fees of $7,272.50 and costs of $18.88 (the "Fee Motion"). As justification for the award of fees and costs, the Debtor stated in the Fee Motion only that BBVA's Complaint "was not substantially justified." The Fee Motion did not specify a statutory or other legal basis for the requested award of fees. The Debtor further explained that the fees and costs he requested were reasonable, necessary, and actually incurred in defending the Complaint. The Debtor's counsel attached detailed time entries to the Fee Motion.

On April 26, 2011, BBVA filed an opposition to the Fee Motion in which it argued: (1) that, in the absence of bad faith, statutory authorization, or contractual provision, attorney's fees may not be awarded in an adversary proceeding; (2) that although it made a crucial mistake in understanding the relevant law, BBVA did not act in bad faith; and (3) that there exists no statutory or contractual basis for an award of fees. In its opposition, BBVA did not dispute the amount of the fees and costs that the Debtor had requested but, without an explanation as to why further time was required or warranted, asked the court to afford it more time to do so if the court concluded that an award of fees and costs was appropriate at all.  Debtor explained that the Complaint had no basis in law, particularly given BBVA's admissions in its opposition, and the Debtor alleged that, contrary to BBVA's opposition, BBVA had made little attempt to settle the matter. The Debtor further asserted that there was ample authority for the court to impose sanctions; he cited Fed. R. Bankr. P. 9011, 28 U.S.C. § 1927, 11 U.S.C. § 105, and case law that he alleged stands for the proposition that federal courts have the inherent power to sanction misconduct.  In its Opinion, the court set forth the procedural background, including the numerous extensions that BBVA had obtained during the course of the adversary proceeding. The court cited various authorities—Fed. R. Bankr. P. 7054(b), Fed. R. Bankr. P. 9011, 11 U.S.C. § 105, 28 U.S.C. § 1927, and applicable case law—as authorizing the imposition of fees and costs and held that it had "the inherent power to regulate litigants' behavior and to sanction a litigant for bad-faith conduct." The court further wrote: “Relying upon its inherent authority to impose sanctions and in the exercise of its discretion, this court finds that the proper sanction that should be imposed as the minimum necessary to deter future litigation abuse is the reimbursement of the Defendants' reasonable legal expenses generated in defending this groundless action. The imposition of sanctions in the amount of the Defendants' reasonable attorney's fees is necessary to deter future unnecessary litigation and to educate the Plaintiff and her attorney. In re Allnutt, 220 B.R. 871 ([Bankr.] D. Md.  [*9] 1998).”

Debtor’s counsel entitled to supplement costs/fees with those expended in successfully defending against the debtor’s objection to its fee app:

In re LUPO, 2012 Bankr. LEXIS 2132 (Bankr. D. Mass. 5/14/12)(Joan N. Feeney, Bankruptcy Judge).
PROCEDURAL POSTURE: Applicant, a law firm that had earlier represented debtor in a Chapter 11 (later converted to a Chapter 7), sought an order per 11 U.S.C.S. § 330 granting supplemental compensation and reimbursement of expenses incurred in defending its original application for compensation, which application had been granted. Debtor opposed compensation on claims that the firm was not properly compensated for time spent defending against debtor's objections.
OVERVIEW: Debtor had objected to the firm’s original fee application on claims that it had committed malpractice, but the court had found no merit to those claims and had granted fees and expenses. The firm then filed the within application for a supplemental award based on the fees and expenses it had incurred in responding to debtor’s objections to the original application. Debtor again opposed the application, but the court granted relief. Noting that courts were divided on the issue of whether fees incurred to defend a fee application were compensable, the court joined with those courts that had concluded that a refusal to grant such applications could dilute the fee award in violation of § 330, thus impermissibly reducing the effective compensation of bankruptcy lawyers. It also found, however, that the amount of such fees had to be carefully considered, and that it was proper to take into consideration that the level of skill and expertise required for preparation and defense of such an application would be less than that required for representation on more substantive issues. Here, as debtor’s malpractice claims were utterly meritless, the firm was entitled to the full amount sought.
OUTCOME: The court overruled debtor's objections and granted the application for compensation and reimbursement.

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