Saturday, September 15, 2012

Bankruptcy Decisions within the First Circuit in July 2012: Part One of Five.

Violation of Discharge Injunction found; hearing set for damages:

In re: Stephen V. COLLINS, and Cynthia J. COLLINS, Debtors; Stephen V. COLLINS, and Cynthia J. COLLINS, Plaintiffs vs. WEALTHBRIDGE MORTGAGE CORP. and MARIX SERVICING, LLC, Defendants, 2012 Bankr. LEXIS 3187 (Bankr. D. Maine 7/12/12)(James B. Haines, Jr., Bankruptcy Judge).
PROCEDURAL POSTURE: Plaintiff discharged debtors and defendant former creditor sought a determination of the creditor's liability for violations of the discharge injunction under 11 U.S.C.S. § 524.
OVERVIEW: The debtors scheduled a mortgage on their property as a claim and sent notice of the case to the then servicer of the mortgage. The debtors stated their intent to surrender the property. The debtors received their discharge and a foreclosure judgment was entered in favor of the servicer. The redemption period on the property ended three months later. The creditor subsequently acquired the servicing rights for the mortgage, and had notice of the debtors' discharge the same day. The creditor sent a total of eight letters to the debtors. The first letter, entitled "Validation of Debt," contained information notifying the debtors of the transfer of the loan, the amounts due under the note, and pertinent information for making future mortgage payments. Additional information about the assignment, alternatives to foreclosure, and property insurance, was provided in subsequent letters. The court held that the creditor was liable for violations of the discharge injunction because the letters it sent to the debtors after both their personal liability and their ownership of the mortgaged premises were extinguished constituted harassments violative of the discharge injunction.
OUTCOME: The court held that the creditor violated the discharge injunction and would schedule a hearing to determine compensatory sanctions.

Creditors motion to dismiss DENIED as debtor’s complaint articulated a cause of action for stay relief violation, violation of applicable NH law (358-C) and federal law (FDCPA):

(In re: Elizabeth J. Lambregtse) Lambregtse v. IndyMac Mortgage Services,
2012 BNH 5; 2012 Bankr. LEXIS 3310 (Bankr. D.N.H. 7/19/12)(Louis H. Kornreich, Bankruptcy Judge, Sitting by Designation).
NOTICE: This is an unreported opinion. Refer to LBR 1050-1 regarding citation.
SUBSEQUENT HISTORY: As Amended July 31, 2012.
PROCEDURAL POSTURE: Plaintiff Chapter 7 debtor filed a complaint against defendant lender, seeking an award of actual, statutory, and punitive damages, as well as costs and attorneys’ fees, for violations of the automatic stay, 11 U.S.C.S. § 362, and of the New Hampshire Unfair, Deceptive, or Unreasonable Collection Practices Act (the Act), N.H. Rev. Stat. Ann. § 358-C. The loan servicer filed a motion to dismiss the complaint under Fed. R. Civ. P. 12(b)(6).
OVERVIEW: Prior to her bankruptcy, the debtor obtained a home equity line of credit. Although the lender had notice of the bankruptcy filing and automatic stay, it contacted the debtor at least 99 times before she received her discharge. Almost a year after the debtor received her discharge, the court granted her motion to reopen, and she filed this adversary proceeding. In response to the motion, the loan servicer raised several affirmative defenses. In order to prove laches, the servicer had to prove that the delay in bringing the suit was unreasonable and resulted in prejudice. As the complaint was silent as to those issues, a determination of laches was premature. Res judicata provided no basis for dismissing the complaint, as the servicer could not establish claim preclusion or issue preclusion. The servicer's assertion that the debtor’s claim under the Act was preempted was premature, as was its argument that it was exempt from the Act under N.H. Rev. Stat. Ann. § 358-C. Making all reasonable inferences in favor of the debtor, the complaint did not fail to adequately plead a cause of action under § 358-C.

Withdrawal of the Reference denied without prejudice since the motion was made during the pendency of a decision briefed before the Bankruptcy Court:

(In re: FIORILLO and KROWEL) GOLDSMITH, TRUSTEE and BALDIGA, TRUSTEE v. MASSAD, MALLEGNI, COMMERCE BANK AND TRUST CO., and LBM FINANCIAL, LLC., 2012 U.S. Dist. LEXIS 100148 (D. Mass. 7/19/12)(Timothy S. Hillman, District Judge)
ORDER ON DEFENDANTS' MOTION TO WITHDRAW THE REFERENCE: This matter comes before the Court on Defendants' Motion to Withdraw the Reference regarding an Adversary Proceeding currently pending before the United States Bankruptcy Court.
Plaintiffs, who are Trustees to the Debtors in the Bankruptcy Proceeding, filed a complaint in the Bankruptcy Court alleging violations of the civil Racketeer Influenced and Corrupt Organization Act (RICO) and other claims pursuant to Massachusetts common law. Defendants, individually, have moved to dismiss that complaint arguing the Trustees' claims are time-barred. Defendants' motions to dismiss have been briefed and argued by the parties before Hon. Hoffman of the Bankruptcy Court. Defendants now ask this Court to withdraw the reference to the Bankruptcy Court, effectively preventing the Bankruptcy Court from deciding the merits of the Trustees' complaint in the Bankruptcy Proceeding. It is settled that Defendants have this right. See, 28 U.S.C. § 157 (d); Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 36, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989); In re Latin Am. Roller Co., 412 B.R. 15, 23 (Bankr. D.P.R. 2009); In re Bank of New England Corp., 360 B.R. 1, 6 (Bankr. D. Mass. 2007). Plaintiffs object to Defendants' attempt to withdraw the reference, contending, among other things, that the complaint is a core proceeding that should be heard by the Bankruptcy Court. 28 U.S.C. § 157 (c) (1); In re Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 68 (1st Cir. 2002). This Court, not the Bankruptcy Court, must make the ruling on a motion to withdraw the reference. In re Bedford Computer Corp. v. Ginn Publ'g, Inc., 61 B.R. 594, 595 (Bankr. D.N.H. 1986). Therefore, this Court must decide whether and when it is appropriate to withdraw the reference from the bankruptcy court. Growe ex rel. Great N. Paper, Inc. v. Bilodard Inc., 325 B.R. 490, 492 (D. Me. 2005).  In the interest of judicial economy, this Court should not yet decide the merits of the Motion to Withdraw the Reference because the Bankruptcy Court has been fully briefed and heard oral arguments on Defendants' motions to dismiss the complaint in the Bankruptcy Proceeding. Estate of Hampton v. Androscoggin County, 245 F. Supp. 2d 150, 158 (D. Me. 2002); Frank S. v. Sch. Comm. of Dennis-Yarmouth Reg'l Sch. Dist., 26 F. Supp. 2d 219, 226 n.14 (D. Mass. 1998). If the Bankruptcy Court denies the motions to dismiss, Defendants are invited to re-file their motion to withdraw the reference. Accordingly, Defendants' Motion to Withdraw the Reference is DENIED without prejudice.

Ch. 11 Administrative Expense status granted, creditor to follow-up with detailed invoices:

IN RE: SWISS CHALET, INC., 2012 Bankr. LEXIS 3195 (Bankr. D.P.R. 7/11/12)(Enrique S. Lamoutte, Bankruptcy Judge).
PROCEDURAL POSTURE: This case was before the court upon a Motion for Payment of Administrative Expenses filed by a creditor seeking an order for debtor to pay its post-petition services in the amount of $87,111 as an administrative expense pursuant to 11 U.S.C.S. §§ 365(d)(3), 503(b)(1)(A). Debtor opposed the motion.
OVERVIEW: 11 U.S.C.S. § 503 allowed as administrative expenses the actual and necessary costs and expenses to preserve and/or benefit the bankruptcy estate. From the date of the filing of the bankruptcy petition until the Order approving the Settlement Agreement, there was no dispute that the creditor provided the services of the Executory Contracts, and it was undisputed that said services benefited the bankruptcy estate. Thus, it amply fit the two-prong administrative expense test: the services in question were rendered post-petition and they benefited the estate. As to the services provided by the creditor after the Settlement Agreement was approved by the court, in said Agreement both parties stipulated that the Executory Contracts were deemed rejected, not pre-petition as debtor contended, but as of the date of the Settlement Agreement onward. In other words, debtor acknowledged that the services the creditor provided from the Settlement Agreement onwards would be considered administrative expenses. After determining whether an expense had or not administrative status, the court then had to determine the amount allowable as an administrative expense.
OUTCOME: The Motion was granted to declare the creditor's services an administrative expense but denied without prejudice in regards to the amounts claimed. The creditor was ordered to file within fourteen days a detailed statement of the services provided, the dates the same were performed, and the amounts.

Stay relief granted nunc pro tunc to bank re serial filer:

IN RE: ARROYO, 2012 Bankr. LEXIS 3327 (Bankr. D.P.R. 7/12/12)
PROCEDURAL POSTURE: Debtor's case came before the court for a hearing to consider a bank's motion requesting retroactive relief from the automatic stay in order to validate a judicial sale of real property executed after the petition date.
OVERVIEW: The Congressional grant of annulment in Section 362(d) gave the bankruptcy courts the authority to grant retroactive relief from the automatic stay. The court had to weigh all facts, or the totality of the circumstances, to determine if there were unusual and compelling circumstances warranting the extraordinary remedy of granting retroactive relief from the automatic stay. The court stated that the filing of the instant petition literally on the eve of the judicial sale in spite of the terms of an agreement reached by the parties, duly represented by counsel, had the intent of forestalling the process that had been going on for the last nine years and which the bank expected to terminate with the judicial sale. Overall, the opportunities afforded to debtor to pay the bank's secured loan, the timing of the serial bankruptcy petitions, particularly the instant fourth petition, the reliance on the terms of the stipulation and the lack of equity in the property, combined, constituted unusual and compelling circumstances to grant retroactive relief from the automatic stay and validate the judicial sale conducted less that 24 hours after the filing of the petition.
OUTCOME: Bank’s motion GRANTED.

Creditors motion to dismiss Ch. 11 case as having been filed in bad faith denied, debtor was entitled to file on eve of foreclosure:

In re: COLBRAN, LLC, 2012 Bankr. LEXIS 3117 (Bankr. D. Mass. 7/10/12)(Melvin S. Hoffman, Bankruptcy Judge).
PROCEDURAL POSTURE: Creditor moved to dismiss this Chapter 11 case for cause under 11 U.S.C.S. § 1112(b)(1) on the grounds that it was not filed in good faith and the bankruptcy court lacked jurisdiction to modify a debt to the creditor for which the creditor alleged the debtor was not liable.
OVERVIEW: The debtor was a Massachusetts limited liability company and the sole beneficiary of a nominee trust that owned certain property. Creditor bank sought to foreclose on the property and the debtor filed for bankruptcy. The creditor moved to dismiss, claiming that the case was not filed in good faith and the bankruptcy court lacked jurisdiction over any attempt to restructure the debt because the debtor was not an obligor on any of the debts secured by the property and did not own the property as of the petition date. The property was transferred to the debtor after the petition was filed. The court noted that whether the case was filed in good faith and whether the bankruptcy court had jurisdiction to oversee a reorganization of the debts depended on whether the property was property of the estate under 11 U.S.C.S. § 541. Here, the bankruptcy of the owner of 100 percent of the beneficial interest in the nominee trust brought into the bankruptcy estate the debtor's beneficial interest in the trust property. The debtor's choice to seek bankruptcy protection from foreclosure of that property was not, in and of itself, an abuse of the bankruptcy process.
OUTCOME: The court found that the debtor's case was not filed in bad faith and that the bankruptcy court had jurisdiction over the property and the debt to the creditor that was secured by the property. Therefore, the motion to dismiss was denied.

Trustee’s objection to debtor’s homestead exemption upheld; homestead exemption waived under P.R. law when bankruptcy filed:

IN RE: GLADYS RUIZ GARCIA, 2012 Bankr. LEXIS 3201 (Bankr. D.P.R. 7/12/12)(Brian K. Tester, Bankruptcy Judge).
OPINION AND ORDER:  Chapter 7 Trustee filed an Objection to Exemptions  to which the Debtor objected. The Trustee argues that under the Puerto Rico Home Protection Act No. 195, enacted on September 13, 2011(in Spanish titled "Ley del Derecho de la Protección del Hogar Principal y el Hogar Familiar", referred to herein as the "PR Home Protection Act"), the homestead exemption claimed by Debtors is inapplicable to bankruptcy cases. Therefore, the Trustee requests that Debtors' claim for exemptions under the PR Home Protection Act be disallowed in order that the bankruptcy estate may sell and liquidate the realty to repay the creditors. Objection to Exemptions is GRANTED and Debtor's claim for homestead exemption pursuant to the PR Home Protection Act is DENIED.  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(d) 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. See In re Hernandez, __B.R. __ 2012 Bankr. LEXIS 1657, 2012 WL1255126*3 (Bkrtcy.D.Puerto Rico, Hon. E. Lamoutte).

Denial of discharge of student loans upheld on appeal:

IN RE JANICE WILSON STEVENSON, Debtor. JANICE WILSON STEVENSON, Plaintiff-Appellant, v. EDUCATION CREDIT MANAGEMENT CORP., Defendant-Appellee, 2012 U.S. Dist. LEXIS 102528 (D. Mass 7/24/12)(Joseph L. Tauro, District Judge).
APPEAL: Pro se appellant Janice Wilson Stevenson appeals from the entry of an order by the United States Bankruptcy Court for the District of Massachusetts finding that her student loan debt owed is non-dischargeable pursuant to 11 U.S.C. § 523(a)(8). The Bankruptcy Court conducted an exhaustive analysis of the circumstances under which student loan debt may be discharged, and ultimately determined that Appellant Stevenson's debt was non-dischargeable because she did not demonstrate that the failure to discharge her debt "would impose an undue hardship . . . ."
DECISION: First, after careful review of the record, and for the reasons stated by the Bankruptcy Court, this court AFFIRMS the Bankruptcy Court's determination that Appellant failed to prove an undue hardship. Second, the District Court reviews the Bankruptcy Court's exclusion of evidence for abuse of discretion. Here, after the close of discovery, Stevenson raised alleged post-petition FDCPA violations by Appellee for the first time. 4 Appellee Education Credit Management  
[*3] Corporation filed a motion with the Bankruptcy Court to exclude evidence of a violation of the FDCPA, 5 which the Bankruptcy Court allowed. 6 The Bankruptcy Court did not abuse its discretion by excluding such evidence. The Bankruptcy Court lacked jurisdiction to hear claims of FDCPA violations that occurred after Stevenson filed her petition because such an FDCPA claim is not related to Stevenson's student loan debt discharge petition. 77 See Goldstein v. Marine Midland Bank, N.A. (In re Goldstein), 201 B.R. 1, 5 (Bankr. D. Me. 1996); cf. Wilkinson v. EMC Mortg. (In re Wilkinson), Bankr. No. 07-50189, Adversary No. 11-05056, 2012 Bankr. LEXIS 163, 2012 WL 112945, at *11 (Bankr. W.D. Tex. Jan. 12, 2012) ("Because the Wilkinsons' unreasonable collection efforts and FDCPA claims arose post-petition . . . this court lacks subject matter jurisdiction to address these claims."); Frambes v. Nuvell Nat'l Auto Fin., LLC (in re Frambes), 454 B.R. 437, 438 (Bankr. E.D. Ky. 2011)  [*4] ("The factual allegations which give rise to the Debtors' claims for violations of the FDCPA . . . have all occurred post-petition and are not property of the Debtor's estate. Whatever their outcome, the Debtor's estate will be unaffected. Thus, the Court lacks "related to" jurisdiction over these claims.").

Lastly, there is no evidence on the record that Appellant raised her retaliation and racial stigma argument before the Bankruptcy Court. It is settled law "that, 'absent the most extraordinary circumstances, legal theories not raised squarely in the lower court cannot be broached for the first time on appeal.'" 8 Such extraordinary circumstances do not exist here. Stevenson has offered no evidence of retaliation or racial stigma against her at any point in the Bankruptcy proceedings. Because Stevenson did not raise a retaliation or racial stigma argument below, she may not do so for the first time before this court. The order by the United States Bankruptcy Court for the District of Massachusetts is AFFIRMED. Consequently, Appellee's Motion to Dismiss [#10] and Appellee's Motion to Strike the Appellant's Appendix [#14] are DENIED AS MOOT. Because Stevenson appealed the Bankruptcy Court's ruling and this court affirms that ruling, Stevenson has fourteen days from the date of this order to inform the Bankruptcy Court, in writing, whether she will participate in the United States Department of Education William D. Ford Direct Loan Repayment Program. If Stevenson does so, and represents that she will, in good faith, abide by the provisions of the Income Based Repayment Plan Option, then the Bankruptcy Court has the authority to amend its original order and enter a judgment partially discharging her student loan debt to the extent any remains at the expiration of the repayment plan under the Ford Program.

Motion to dismiss granted for failure to file MORs and related reasons:

IN RE: MARIA VIRGINIA SANTOS FRANCO, 2012 Bankr. LEXIS 3524 (Bankr. D.P.R. 7/27/12) (Enrique S. Lamoutte, Bankruptcy Judge).
PROCEDURAL POSTURE: A secured creditor filed a motion to dismiss pursuant to 11 U.S.C.S. § 1112(b)(1). The debtor in possession opposed the motion.
OVERVIEW: The creditor alleged that the debtor failed to timely file monthly reports of operation (MORs), failed to file a disclosure statement and plan, and was administratively insolvent. The court found that cause existed for dismissal pursuant to § 1112(b)(4)(A), as the debtor’s estate had diminished in value and the debtor failed to present evidence that there was a viable Chapter 11 plan. Cause also existed for dismissal under § 1112(b)(4)(F), as the debtor repeatedly filed tardy MORs and failed to file the MORs for two months. Cause for dismissal also existed under § 1112(b)(4)(I), as the MORs showed that the debtor was not paying all post petition state and federal taxes. Dismissal, rather than conversion, was in the best interest of creditors and the estate due to ongoing litigation over the only remaining asset of the estate and the amount of secured claims encumbering that asset. The debtor failed to demonstrate any unusual circumstances establishing that dismissal or conversion was not in the best interests of the creditors and the estate.
OUTCOME: The creditor's motion to dismiss was granted.

Administrative claim denied; unsecured claim granted:

In re ROBERT N. LUPO,  2012 Bankr. LEXIS 3432 (Bankr. D. Mass 7/23/12)(Joan N. Feeney, Bankruptcy Judge).
PROCEDURAL POSTURE: Chapter 7 trustee objected to an administrative proof of claim and a proof of claim filed by a purported creditor.
OVERVIEW: The creditor claimed that she worked for the debtor as a property manager, real estate salesperson, and business manager. The trustee maintained that the creditor was never employed by the debtor. The court found that the debtor in fact employed the creditor as both a property manager and salesperson. To the extent that there was no evidence as to the rate at which she should have been compensated, the court had sufficient evidence to fashion relief based upon quantum meruit. With respect to the creditor's request for the payment of administrative expenses, the court held that the overwhelming weight of the evidence compelled the conclusion that the creditor was not entitled to any compensation for postpetition services as an employee or salesperson. The evidence submitted by the creditor was wholly insufficient for the court to conclude she was entitled to payment of her claimed administrative expenses. She failed to satisfy her burden of proof that any services she performed postpetition were actual and necessary expenses of preserving the estate or conferred a benefit on the bankruptcy estate, within the meaning of 11 U.S.C.S. § 503(b)(1)(A).
OUTCOME: The court allowed the creditor a prepetition unsecured claim and denied her request for payment of any sums as administrative expenses of the Chapter 11 bankruptcy estate.

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