Recent Decisions Regarding Bankruptcy & Foreclosure in the First Circuit: June 2012, Part Two of Four.

Homestead Exemptions suffer a blow in Puerto Rico:

IN RE: GREEN, LOPEZ,  2012 Bankr. LEXIS 2955 (Bankr. D.P.R. 6/27/12)(Brian K. Tester, Bankruptcy Judge).

Opinion & Order:  Objection to Exemptions is granted and Debtors' claim for homestead exemption pursuant to the PR Home Protection Act is denied.
DISCUSSION: Debtors filed a voluntary petition under Chapter 13. Debtors listed their primary residence in Schedule C with a value, as of the date of the filing of the petition, of $87,500.00.  As it appears from the Schedules, said property is not encumbered with any mortgage liens. Debtors claim a homestead exemption over their primary residence for the totality of the value of the property, pursuant to the PR Home Protection Act.  The Trustee argues that the recent PR Home Protection Act is inapplicable to bankruptcy cases, and, as such, Debtors' homestead exemption must be disallowed. The Trustee mainly relies on the specific waivers to the homestead exemption that the PR Home Protection Act incorporates in its Article 4.  Article 4 of the PR Home Protection Act provides that the homestead protection is unwaivable, except in those circumstances expressly enumerated in said article. Applicable to this case, Article 4(b) provides that the homestead protection is waived in those cases where the Bankruptcy Code is applicable. Thus, by its plain terms, the protections of the PR Home Protection Act are exclusive of the exemptions afforded by the Bankruptcy Code. Pursuant to Article 4 of the PR Home Protection Act, when Debtors filed for bankruptcy, they automatically waived the homestead protection provided therein.

Appeal claiming the Bankruptcy Court did not have the power to sua sponte transfer a fraudulent transfer case to the District Court deemed moot and appeal dismissed:

EGARRA-MIRANDA v. SITKA ENTERPRISES, INC., 2012 U.S. Dist. LEXIS 77907 (D.P.R. 6/5/12)(Jose Antonio Fuste, District Judge).

OPINION AND ORDER:
Pending before this court is an appeal filed by appellant Wilfredo Segarra-Miranda (Ch. 7 "Trustee") against appellee Sitka Enterprises, Incorporated ("Sitka"). Trustee challenges the transfer of an adversary proceeding in the bankruptcy court to the district court. On August 11, 2009, Trustee began an adversary proceeding against the Debtors and Sitka, a corporation to which the Debtors had transferred estate property, arguing that that transfer was a fraudulent conveyance. After the bankruptcy court denied the defendants' motion to dismiss, the defendants filed an appeal with the district court. On August 10, 2011, the Honorable Carmen C. Cerezo granted that appeal; based on Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), the court held that the "fraudulent conveyance action brought by the trustee . . . cannot be adjudicated by the Bankruptcy Court since it lacks constitutional authority to do so," and remanded the case to the bankruptcy court to proceed accordingly. In conformity with that order, the bankruptcy court "concluded that the matter must be adjudicated by the U.S. District Court" and sua sponte transferred the entire adversary proceeding to the district court.  In a separate appeal arising out of the same proceedings, U.S. District Court Judge Gustavo A. Gelpí held that the bankruptcy court lacked authority to sua sponte transfer the entire case because of the problematic fraudulent conveyance claim and remanded the transferred case back to the bankruptcy court. Judge Gelpí recently remanded the case to the bankruptcy court after an appeal from the same adversary proceeding (involving similar issues). That decision has rendered the present appeal moot. The issues in this appeal have already been resolved and the case remanded to bankruptcy court. We cannot provide a remedy and, therefore, we dismiss the present appeal.

Ch. 7 POC filed late was allowed but subordinated;

Claim not estimated as no real expectation it would be paid:

IN RE: MICHAEL VAN BIBLE, 2012 Bankr. LEXIS 2570 (Bankr. D.P.R. 6/5/12)(Edward A. Goday, Bankruptcy Judge).

PROCEDURAL POSTURE: A creditor filed its proof of claim in the amount of $2.5 million. The claim was based on a pending lawsuit filed by the creditor against debtor in the Circuit Court for Scott County, Tennessee. This proceeding was before the court on the objection to claim and motion for disallowance filed by debtor, the answer to the objection to claim and the motion for allowance filed by a creditor, and debtor's reply.
OVERVIEW: The main issue for the court was whether the late proof of claim should be disallowed in a chapter 7 bankruptcy proceeding when the creditor was admittedly notified and had knowledge of the case in time to submit its claim before the bar date but failed to do so, or, if in the alternative, the claim should be allowed as subordinate to timely filed claims. Under 11 U.S.C.S. § 726(a), tardily filed claims in chapter 7 cases were not disallowed, necessarily, for distribution purposes but, rather, were generally subordinated to distributions on timely filed claims of the same priority. 11 U.S.C.S. § 502(a) provided that a claim was deemed allowed unless a party in interest objected. Section 502(b)(9) governed the allowance or disallowance of objected-to, tardily-filed claims: it excepted from disallowance those claims that were tardily filed as permitted under § 726(a)(1), (2), or (3). As such, § 502(b)(9) expressly provided for the allowance of the tardily filed claim as permitted by § 726(a)(3). The court also noted that as the case presently stood, estate assets would be exhausted before reaching the creditor's subordinated claim: making estimation of its claim unnecessary.
OUTCOME: Debtor's objection to the claim and his reply to the creditor's motion for allowance were denied. Claim number 7-1 was allowed, but it was subject to the creditor prevailing in its lawsuit against debtor in Scott Count, Tennessee and, in that event, it would be subordinated to timely-filed claims of the same priority.

Where Trustee’s complaint contained mixed legal & equitable claims, all counts containing facts common to both were to be given a jury trial;

Court ordered Defendants to file a Withdrawal of the Reference Motion:

(In re: BASILE) NICKLESS, CHAPTER 7, TRUSTEE v. DISTEFANO, MOTTA, 2012 Bankr. LEXIS 2504 (Bankr. D. Mass. 6/4/12)(Melvin S. Hoffman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff Chapter 7 Trustee brought an eight-count adversary proceeding against defendants, alleged transferees. Defendants claimed the right to a jury trial on the multi-count amended complaint. The trustee disagreed with defendants' assertion of a jury trial right and in the alternative requested that if they were so entitled, the jury trial be conducted in the bankruptcy court.
OVERVIEW: When an action involved a combination of both legal and equitable claims, the U.S. Const. amend. VII right to jury trial on the legal claim, including all issues common to both claims, remained intact. Consequently facts common to legal and equitable claims must be adjudicated by a jury. Except for instances not relevant in this case, the right to trial by jury was not lost simply because an action was asserted in the bankruptcy court, even in a matter designated by Congress as core under 28 U.S.C.S. § 157(b). With these and other principles in mind, the court turned to an examination of the claims raised in the trustee's amended complaint. The court found that the defendants were entitled to a jury trial on Counts I, II, III, IV, and V of the trustee's amended complaint and that the relevant facts raised in those counts were common to the equitable counts, VI, VII and VII. Therefore, the action had to be tried to a jury before any judgment could be entered on Counts VI, VII, and VIII. The court also stated that although the bankruptcy court in the District of Massachusetts could conduct jury trials, it could not do so without the express consent of all the parties.
OUTCOME: Defendants were entitled to a jury trial on Counts I, II, III, IV, and V of the trustee's amended complaint and the relevant facts raised in those counts were common to the equitable counts, VI, VII, and VII. Therefore, the action had to be tried to a jury before any judgment could be entered on Counts VI, VII, and VIII. Defendants were ordered to file a motion to withdraw the reference.

Court denied creditor’s motion to dismiss as Debtor’s complaint pled a cause of willful stay violation:

(IN RE: ADORNO) ADORNO v. COOPERATIVA AC NUESTRA SENORA, 2012 Bankr. LEXIS 2785 (Bankr. D.P.R. 6/15/12)(Brian K. Tester, Bankruptcy Judge).

PROCEDURAL POSTURE: Defendant, a collection agent for a co-defendant that was one of debtor's creditors, filed an amended motion to dismiss the complaint filed by plaintiff, a Chapter 13 debtor, charging this defendant and others with willfully violating the automatic stay provisions of the Bankruptcy Code and seeking damages by reason thereof.

OVERVIEW: The agent apparently was taking steps to enforce his client’s claim against debtor. When plaintiff charged the agent with willfully violating the stay, the agent countered that his conduct was not “willful” because he had lacked any knowledge of the bankruptcy filing until May 12, 2012, and that he ceased all such conduct as soon as he had notice of the filing. Plaintiff claimed that the agent had acquired knowledge of the filing by way of notice that was given to the creditor on or about the date of the filing and that the agent also was chargeable with knowledge thereof based on debtor’s statement to a process server employed by the agent to the effect that she had filed Chapter 13. The court denied relief. First, plaintiff’s complaint satisfied the standard in Fed. R. Civ. P. 8 that it contained a short and plain statement of the claim containing sufficient factual material which, if accepted as true, stated a claim that was facially plausible. Applying that test, the court held that the well-pleaded facts of the complaint gave rise to a plausible inference as to the extent of the agent’s knowledge and resulting liability for breach of stay and that dismissal was not warranted.
OUTCOME: The court denied the amended motion to dismiss.

Debtor was corporation not d/b/a, so Ch.13 case dismissed:

IN RE: AGRINSONI,  2012 Bankr. LEXIS 2936 (Bankr. D.P.R. 6/26/12)(Brian K. Tester, Bankruptcy Judge).

PROCEDURAL POSTURE: A creditor moved to dismiss a debtor’s case based on his alleged ineligibility to serve as a Chapter 13 debtor pursuant to 11 U.S.C.S. § 109(e) because he operated a for profit professional services corporation and not a d/b/a as asserted in his voluntary petition.

OVERVIEW: The debtor admitted that his business was a for profit professional corporation. However, he alleged that by the way he operated his business (to make payments of a personal nature such as mortgage payments, car payments, and child support) it had to be considered as a d/b/a/ and not a corporation for purposes of his bankruptcy case. The court found that the debtor’s business was a corporation created under the Puerto Rico General Corporations Law of 1995 and was a duly registered and active corporation. As such, it was barred from obtaining relief under Chapter 13. Therefore, the case had to be dismissed. The court noted that the individual was not precluded from filing bankruptcy on his own behalf, in which case the assets of the corporation would not be property of the estate, only his interest in the corporation.
OUTCOME: The motion to dismiss was granted.

W/D of reference granted where bifurcation of claims between Bankruptcy and District Court would not be economic and possibly create inconsistent outcomes:

RILEY, CHAPTER 7 TRUSTEE v. CRAPSER, SHOGEL, 2012 U.S. Dist. LEXIS 77784 (D. Mass. 6/5/12)(George A. O’Toole, Jr. District Judge).

OPINION AND ORDER:
In the Chapter 7 bankruptcy proceeding of debtor Steven R. Crapser, the Chapter 7 Trustee, Lynne Riley, has commenced an adversary proceeding to recover for the benefit of the estate proceeds of the sale of a parcel of real estate, title to which was held by Francine S. Shogel, Crapser's wife. The Trustee's theory is that while title to the property had been in Shogel's name, Crapser had furnished some or all of the purchase price and therefore either (a) a resulting trust arose in Crapser's favor, giving him an interest in the property and hence the proceeds that the Trustee can enforce on behalf of the estate or (b) if a resulting trust could not be found, then there were serial fraudulent transfers by Crapser in the form of mortgage payments he made within four years of the commencement of the bankruptcy.  Shogel, named as a defendant in the adversary proceeding, has moved to withdraw the reference of the matter arguing that she is entitled to a jury trial on some or all of the issues raised by the complaint, and that Stern v. Marshall requires a conclusion that a non-Article III bankruptcy judge lacks authority to enter a final judgment on the Trustee's claims. The parties are in agreement that Shogel has a jury trial right at least with respect to the fraudulent transfer claim. While I agree with the Trustee that Shogel does not have a right to have the resulting trust claim tried by a jury because it is an equitable claim, I do not agree that her proposed course of action is recommended by considerations of economy and efficiency. There would be two possible outcomes if the resulting trust claim were presented to and decided by a bankruptcy judge in the first instance. On balance, then, economy and efficiency are best served in this instance by bringing the complaint to this court where a simultaneous trial of both theories on a largely common factual presentation can be had before a tribunal with undoubted authority.
OUTCOME:  The motion to withdraw the reference is GRANTED.

Ch. 11 Plan did not provide for payment of post-petition taxes,

Tax creditor did not object, so taxes unpaid:

IN RE: ABRAHAM PETROLEUM CORPORATION, 2012 Bankr. LEXIS 2964 (Bankr. D.P.R. 6/28/12) (Enrique S. Lamoutte, Bankruptcy Judge).

PROCEDURAL POSTURE: A creditor of Chapter 11 debtor, the Municipal Revenue Collection Center (CRIM), filed a motion for reconsideration of the court's order granting the debtor's request for the cancellation pursuant to 11 U.S.C.S. § 1141(c) of certain post-petition tax statements filed by CRIM. The court treated the motion as one under Fed. R. Civ. P. 59(e), made applicable through Fed. R. Bankr. P. 9023.
OVERVIEW: CRIM did not file a request for payment of an administrative expense for post-petition taxes. The court cancelled the tax statements. CRIM argued that the post-petition real property taxes in controversy constituted administrative expenses which were addressed in the debtor's confirmed plan, which stated that the expenses would be paid upon the plan's effective date. The court held that the plan only provided for the payment of allowed administrative claims, and did not include the post-petition property taxes in controversy. CRIM's failure to object to the debtor's plan of reorganization was fatal since the confirmation of a plan operated as a final judgment which precluded all questions regarding the treatment of creditors under the plan, discharge of liabilities, or dispositions of property that could have been raised which pertained to a confirmed plan.
OUTCOME: The court denied the motion.

SJ as to legal issue that mortgage discharged;

Material factual dispute preventing SJ as to whether Trustee was entitled to post-petition payments made on account of the mortgage before it was discovered it was discharged:

(In re MAMMOLA) DWYER, CHAPTER 11 TRUSTEE v. ROCKLAND TRUST COMPANY, 2012 Bankr. LEXIS 2901 (Bankr. D. Mass 6/26/12)( Joan N. Feeney, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff Chapter 11 trustee sought summary judgment on her action against creditor bank seeking a declaration that a mortgage executed by the debtor had been discharged and that post-petition payments on the mortgage were voidable pursuant to 11 U.S.C.S. § 549 and subject to turnover.
OVERVIEW: The debtor, as trustee of a nominee trust, executed a mortgage on a piece of real property. After the debtor filed for Chapter 11 bankruptcy, the creditor bank filed a proof of claim stating that it had a secured claim based on a 2004 mortgage. The trustee made post-petition payments to the creditor bank. When the property was sold, it was discovered through the buyer's title examination that the 2004 mortgage had been discharged by the bank's predecessor. The Chapter 11 trustee then sought this declaration that the mortgage was discharged. The court concluded that the Chapter 11 Trustee had sustained her burden with respect to 11 U.S.C.S. § 544(a)(3). The bank did not hold a secured claim and its equitable lien was preserved for the benefit of the estate. The Chapter 11 trustee was not charged with notice of a defect in the discharge because, under Massachusetts law, the recording of a mortgage discharge was conclusive evidence of the release of the encumbrance on the mortgage property. The remaining counts seeking turnover and fees were not subject to summary judgment because material facts remained in dispute.
OUTCOME: The court granted the Chapter 11 Trustee's motion for summary judgment with respect to a declaration that the mortgage at issue was discharged, but denied the motion as to the remaining counts and scheduled those issues for hearing.

Fraudulent transfers did not require solvency snapshot as to each transfer:

(In re: CABRERA) FERRARA, TRUSTEE v. CABRERA, 2012 Bankr. LEXIS 2483 (Bankr. D.R.I. 6/1/12)(Arthur N. Votolato, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff Chapter 7 trustee filed a complaint against defendant transferees pursuant to the Rhode Island Fraudulent Transfer Act and Section 544(b) to recover allegedly fraudulent transfers to insiders. The transferees were the children of the debtors and the debtor husband’s former wife.

OVERVIEW: Nearly three years before their bankruptcy petition was filed, the debtors sold their real estate and paid off some, but not all, of their unsecured debt. Shortly thereafter, over a 22-day period, they transferred the remaining proceeds to their three children and to the debtor husband’s former wife. The debtors admitted that they did not receive reasonably equivalent value for the transfers. The court found that the transfers were part of a scheme to distribute the debtors’ assets in favor of their children to the detriment of creditors. The court rejected the debtors’ argument that for purposes of determining whether they were insolvent, the court should take a solvency snapshot of each transfer before going on to examine the next transfer.
OUTCOME: The court entered judgment in favor of the trustee.

First Circuit affirms District Court’s denial of reconsideration to exclude certain defendants from settlement:

FÁBRICA DE MUEBLES J.J. ÁLVAREZ, INCORPORADO, Plaintiff, Appellant, v. INVERSIONES MENDOZA, INC.; FRANK C. STIPES; MIGUEL A. VÁZQUEZ; XL SPECIALTY INSURANCE COMPANY; LIBERTY MUTUAL INSURANCE COMPANY; ACE INSURANCE CO.; WILLIAM M. VIDAL-CARVAJAL; XL PROFESSIONAL; LIBERTY INTERNATIONAL UNDERWRITERS, INC.; CHARTIS INSURANCE CORPORATION OF PUERTO RICO, Defendants, Appellees, FEDERAL DEPOSIT INSURANCE CORPORATION; BANCO POPULAR DE PUERTO RICO, as Successor in Interest of Westernbank de Puerto Rico; ROSA VICENS, Defendants., 2012 U.S. App. LEXIS 11240 (1^st  Cir. 6/4/12)(Before JUDGES Lynch, Boudin & Lipez, Circuit Judges, Opinion by Lipez):

PROCEDURAL POSTURE: Plaintiff brought suit against a bank whose successor was defendant successor under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-68, as well as under several Puerto Rico law causes of action. The U.S. District Court for the District of Puerto Rico dismissed the case following a partial settlement and denied two motions for reconsideration. Plaintiff appealed.
OVERVIEW: Plaintiff argued that the district court abused its discretion in denying the second motion for reconsideration because, while plaintiff agreed to the dismissal of the RICO claims against the successor, plaintiff never agreed to the dismissal of its RICO claims against the bank's employees. The court found that it was reasonable for the district court, after settlement, to have viewed the dismissal order as encompassing all the RICO claims because it was reasonable to believe that the RICO claims against the successor were the only RICO claims in the case because the district court did not authorize plaintiff to amend the complaint to add the employees, it was not clear that the complaint stated a claim under RICO against the employees or was intended to do so, and it was not until the district court denied the first motion to reconsider that plaintiff filed a new motion raising, for the first time, the issue of RICO claims against the employees. Accordingly, the district court did not abuse its discretion in denying plaintiff's second motion for reconsideration.
OUTCOME: The judgment was affirmed.

Denial of discharge for failure to accurately disclose bank account:

(In re RIVERA) AGIN, CHAPTER 7 TRUSTEE v. RIVERA, 2012 Bankr. LEXIS 2863 (Bankr. Bankr. D. Mass. 6/22/12)(Joan N. Feeney, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff Chapter 7 trustee filed a complaint against defendant debtor seeking the denial of her discharge pursuant to 11 U.S.C.S. § 727(a)(2)(B) and (a)(4)(A) and an award of costs pursuant to Fed. R. Bankr. P. 7054(b). At the conclusion of trial, counsel to the trustee withdrew the 11 U.S.C.S. § 727(a)(2)(B) count.
OVERVIEW: The debtor failed to disclose the existence of a credit union account and reported a balance of $750 in a savings account that actually had a balance of $4,000. The court found that the debtor made a false oath and account knowingly and fraudulently. She admitted that she knew of the existence of the credit union account and the balance of her savings account when she omitted and undervalued those accounts on her schedules. Her trial testimony established that she willfully and intentionally swore to what she knew was false both on her schedules and at the § 341 meeting. Her fraudulent intent was especially apparent with respect to her submission of schedules reflecting a savings account balance net of an expense she had not incurred. While she may have earmarked some of the funds in that account to pay her father’s nursing home expenses prior to filing her schedules, she knew by the time of the § 341 meeting that she had not used any funds for that purpose. At a minimum, her acts and omission established a reckless indifference to the truth which was the functional equivalent of fraud for purposes of 11 U.S.C.S. § 727(a)(4)(A).
OUTCOME: The court entered judgment in favor of the trustee and against the debtor on the 11 U.S.C.S. § 727(a)(4)(A) count. Judgment was entered in favor of the debtor with respect to the trustee's request for an award of costs because this was an asset case, without prejudice to the trustee's ability to seek reimbursement of such costs in his application for compensation as Chapter 7 trustee or as counsel to the trustee in the debtor's bankruptcy case.

SJ granted in debtor’s favor on discharge complaint as lawyer’s failure to maintain malpractice insurance sufficient to cover creditor’s loss was garden variety breach of contract claim:

(In re: MCCARTHY) STEWART TITLE GUARANTY COMPANY v. MCCARTHY, 2012 Bankr. LEXIS 2711 (6/14/12)(Melvin S. Hoffman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff creditor filed a complaint against defendant Chapter 7 debtor seeking a determination that a debt was excepted from discharge per 11 U.S.C.S. § 523(a)(2), (a)(4), and (a)(6). The creditor moved for summary judgment on the § 523(a)(2) and (a)(4) counts. The debtor opposed creditor’s motion and moved for summary judgment on the § 523(a)(6) count.
OVERVIEW: The debtor’s law firm entered into an agreement with the creditor, a title guaranty company, in which the firm was designated as a limited agent of the creditor for purposes of issuing title insurance policies. In connection with the agreement, the firm agreed to keep in force a professional liability insurance policy naming the creditor as a beneficiary. The creditor alleged that any debt for which it might be obligated under a title insurance policy as a result of a title defect was one for which the debtor would ultimately be liable to the creditor. The court held that an indemnification debt was not the type of debt that § 523(a) sought to redress. To the extent the creditor’s § 523(a)(2) count was grounded on allegations that the debtor failed to maintain malpractice insurance without any gaps in coverage, this was a garden variety breach of contract claim. With respect to § 523(a)(4), there was no connection between the debtor’s status as a fiduciary for the creditor and the alleged misconduct. With respect to § 523(a)(6), there was nothing to suggest the debtor intended to harm the creditor by negligently closing a loan and then allowing his malpractice insurance to lapse.
OUTCOME: The creditor's motion for summary judgment was denied, and summary judgment was entered in favor of the debtor.