Sunday, November 25, 2012

Around the Circuits regarding recent bankruptcy decisions.

First Circuit:
Construction debt NOT discharged;
focus is on entire transaction, not just the contract at issue;

SHARFARZ, Appellant, v. GOGUEN [Debtor], Appellee, 691 F.3d 62 (1st Cir. 2012) (Before Justices Boudin, Souter, Thompson, Opinion by Thompson). 

“What happened in this bankruptcy case is probably every homeowner's worst nightmare." 
HELD: First Circuit vacated the BAP's judgment and remanded to that tribunal with directions that it, in turn, remand the case to the bankruptcy court for further proceedings consistent with this opinion. 
SUMMARY:  The First Circuit agreed with the Bankruptcy Court that the construction debt at issue was not discharged per Section 523(a)(2)(A). While the BAP found that creditor failed to satisfy the cause-in-fact rule that the chapter 7 debtor's misrepresentations induced him to enter into the construction contract, the First Circuit disagreed and found the focus to be broader, examining the transaction.  Examining the transaction, the First Circuit found that the creditor satisfied its proof as to cause-in-fact and legal cause. Thus, the creditor showed that the debtor's lies led to a loss that might reasonably have been expected to result from the reliance i.e. as the debtor (pre-petition) strung the creditor along with lies about the permit application relevant to the projected construction project, the debtor could have reasonably foreseen that his deceit would delay the project, which would lead to the project pouring concrete in cold weather, which in turn would lead to the concrete foundation cracking.  So, to put the point in "Restatement" terms, creditor's reliance on debtor's misrepresentations resulted in a "loss" that could "reasonably" have been "expected" to occur "from the reliance" — indeed the loss here was expected. Creditor prevails because he adequately proved causation and debtor did not bear his burden of showing an intervening or superseding cause. Consequently, the First Circuit reversed the BAP's decision which BAP decision reversed the bankruptcy court.  Finally, the amount not discharged will be determined upon remand to the bankruptcy court. 

Income tax refund is property of the estate and thus exemptable:

MATOS [Debtor], Appellant, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-074(BAP 1st Circuit Sept. 26, 2012) (Before Judges Boroff, Deasy, and Bailey) (Opinion by Deasy).   
HELD: Bankruptcy Appellate Panel reversed the bankruptcy court's determination that the income tax refund at issue was not property of the estate. BAP found that the income tax refund was property of the chapter 13 bankruptcy estate and thus could be exempted on Schedule C.  As such, the Chapter 13 trustee's objection to the debtor's exemption in the refund is overruled.  For a similar ruling, see SANTIAGO, MORALES, Appellants, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-075 (BAP 1st Circuit   September 26, 2012) (Before Boroff, Deasy, and Bailey, Opinion by Deasy). 
Date of valuing collateral is "flexible"; 
post-petition interest paid to over-secured creditor at default rate and compounded:

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant / Cross-Appellee, v. CITY OF BOSTON, Appellee, and SW BOSTON HOTEL VENTURE, LLC, et al., Appellees / Cross-Appellants [Debtors],  BAP NO. MB 11-079, (BAP 1st Circuit October 1, 2012) (Before Haines, Deasy, and Tester, Opinion by Deasy).   
HELD: BAP AFFIRMS the Default Rate Calculation, REVERSES the 506(b) Order and the Prudential Claim Order, and REMANDS. 
SUMMARY:  The BAP held that they will follow the "flexible" approach rather than a fixed date for valuation of collateral for purposes of Section 506(b), and in so doing the creditor's debt was determined to be over-secured and the creditor entitled to be paid then post-petition interest, said interest paid at the contract's default rate and compounded. 

Chapter 11 plan allowed to be modified in light of above decision:

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant / Cross-Appellee, v. CITY OF BOSTON, Appellee, and SW BOSTON HOTEL VENTURE, LLC, et al., Appellees / Cross-Appellants [Debtors],  BAP NO. MB 11-087, BAP 1st Circuit October 1, 2012) (Before Haines, Deasy, and Tester, Per Curiam).  
Prudential Insurance Company of America appealed from the bankruptcy court’s decision and accompanying order confirming the Debtors’ Modified First Amended Joint Plan of Reorganization and the order overruling Prudential’s objection to confirmation of the Plan. Because the  BAP’s above opinion and reversal altered the landscape dramatically, its practical result is a significant increase in the amount of Prudential’s claim, which, in turn, impacts the evaluation of the Plan’s terms under §1129. Thus, the BAP vacated the Confirmation Orders, so as to afford the Debtors an opportunity to amend the Plan’s terms to account for the increased amount of Prudential’s claim (per the above opinion) and the resulting pay out to Prudential and/or for the bankruptcy court to fashion alternative forms of relief for Prudential that would not unravel the reorganization. 

Remand exceeded scope of prior appellate review; late filing was not time barred;
discharge complaint to thus go forward;

GONSALVES, Plaintiff-Appellant, v. BELICE [Debtor], Defendant, Appellee, BAP NO. MB 11-048, (BAP 1st Cir. October 15, 2012) (Before Lamoutte, Haines, and Deasy, Opinion by Haines) [No brief filed for Appellee, Appellant Pro Se].  
Gonsalves, a pro se creditor, appealed: (1) the order granting the motion of the debtor to dismiss Gonsalves’ adversary complaint; and (2) the order denying Gonsalves’ motion for relief from judgment.  As the BAP concluded that the dismissal was not only beyond the scope of their prior remand but was also legal error, they VACATED the orders and REMANDED the matter for further proceedings consistent with this opinion.  In a prior opinion, the BAP found that the debtor's notice to the creditor was so defective as to defeat notice of the bankruptcy case or discharge bar date, allowing then the creditor to go forward on one of his two counts challenging the dischargability of his debt, with the Section 727 count being time barred but the §523(a) count not. Thus, the bankruptcy court's dismissal of the §523(a) count exceeded the scope of the prior remand i.e. BAP had concluded in its prior opinion that the creditor's complaint presented a plausible case for relief under §523(a)(3). Therefore, it was error for the bankruptcy court  to dismiss this claim on the grounds that he failed to state a claim upon which relief can be granted.  On remand, debtor again sought dismissal under Rule 12(b)(6), this time based on his argument that creditor had failed to file the §523(a)(3) count within one year of his discharge, despite having received notice a month prior to that anniversary. Debtor erroneously contended that the one year limitation set by §727(e) for discharge revocation actions applied to the creditor's §523(a)(3) claim. Creditor argued that because the BAP's remand confined the bankruptcy court to consideration of the merits of his §523(a)(3) count, it was error to expand its scope to include a request for dismissal based on timeliness. He contends that it was also error to dismiss his complaint for failure to file a response to the dismissal motion when he had, in fact, filed an objection. He lastly reiterates that his complaint was not time-barred. The BAP agreed. 

Construction debt WAS discharged as fraudulent intent not found:

BELLAS PAVERS, LLC, Plaintiff-Appellant, v. STEWART [Debtor], Defendant-Appellee, BAP NO. MB 12-017, (Before Lamoutte, Kornreich, and Cabán, Opinion by Cabán) (BAP 1st Circuit  October 18, 2012). 
This case arises out of an adversary proceeding brought by Bellas Pavers, LLC seeking to except from discharge a debt owed by Stewart for masonry services. The bankruptcy court conducted a trial, and at the close of Bellas’ case, Stewart moved for a judgment on partial findings pursuant to Fed. R. Civ. P. 52(c), which the Court granted and entered judgment in favor of Stewart. Thereafter, Bellas filed a motion pursuant to Fed. R. Civ. P. 59(a) requesting a new trial, or in the alternative, that the bankruptcy court reopen the original trial, enter new findings of facts and conclusions of law, find in Bellas’ favor on all counts, and enter a judgment of non-dischargeability. The bankruptcy court denied the motion for a new trial, and Bellas appealed. Controversy centers on the construction of a stone patio and retaining wall where the debtor failed to pay a sub-contractor even though the debtor was paid for the job. The bankruptcy court conducted a trial. After plaintiff put on two witnesses, Stewart moved for a judgment on partial findings pursuant to Rule 52(c), asserting three grounds: (1) lack of personal liability for Premier’s actions (the agreement was between Bellas and Premier, not Stewart); (2) lack of evidence that Stewart had fraudulent intent when he entered into the agreement with Bellas on Premier’s behalf; and (3) lack of evidence that Bellas had reasonably relied on Stewart’s representations. As to the question of fraudulent intent, the bankruptcy court stated as follows: It’s perfectly consistent [with] the evidence that Mr. Stewart did, in fact, intend when he entered into the contract with Bellas on behalf of Premier to have Bella[s] paid. I have nothing in my record that indicates that that was a lie. . . I don’t know what happened that Premier/Stewart didn’t pay Bellas Pavers. Maybe they just ran out of money. I don’t know what they did with the money, but that doesn’t prove that it should be a debt [sic] will be – which would be nondischargeable in bankruptcy.”  Given these facts, the bankruptcy court granted Stewart’s motion under Rule 52(c), and entered judgment in his favor. Thus, based upon the record, we conclude that the bankruptcy court did not err by not inferring fraudulent intent from the totality of the circumstances. 


MOTION FOR COSTS AND FEES DENIED: Stewart filed a separate motion under Bankruptcy Rule 8020 seeking damages, including attorneys’ fees and costs, incurred in defending this appeal.  Bellas objects to the motion. Bankruptcy Rule 8020 provides: If a . . . bankruptcy appellate panel determines that an appeal . . . is frivolous, it may, after a separately filed motion . . . and reasonable opportunity to respond, award just damages and single or double costs to the appellee.  While there is no formula for determining whether an appeal is frivolous, courts generally consider several factors, including: the appellant’s bad faith, whether the argument presented on appeal is meritless in toto, and whether only part of the argument is frivolous. A court may consider whether the appellant’s argument addresses the issues on appeal, fails to cite any authority, cites inapplicable authority, makes unsubstantiated factual assertions, asserts bare legal conclusions, or misrepresents the record. However, “[Bankruptcy] Rule 8020 is far from a strict liability model. More than just a losing argument is necessary to support a conclusion that an appeal is frivolous.  An appeal is frivolous if the result is obvious or the arguments supporting the appeal are wholly without merit. Such is not the case herein.

Third Circuit:

Ch. 13 Trustee must return undisbersed confirmed funds to debtor upon conversion to Ch. 7:

In re: Michael,  (3d Cir. Pa. October 26, 2012). 
Appeal decided that at the time of conversion from Ch. 7 to Ch. 13, a Chapter 13 trustee must return to the debtor the funds the Ch. 13 trustee is holding regarding funds acquired post-petition by the debtor for eventual distribution to creditors under a confirmed Chapter 13 plan.  The Bankruptcy Court held that the funds were to be returned to the debtor at the time of conversion, the District Court affirmed the Bankruptcy Court's holding and the Court of Appeals affirmed the District Court's decision.

Debtor waived right to appeal sentence:

United States of America v. Vincent Scirotto, (3d Cir. Pa. October 2, 2012).
Debtor appealed his fifteen-month sentence following a guilty plea to one count of making a false declaration in a bankruptcy case in violation of 18 U.S.C. Section 152(3).  The false declaration was debtor’s filing a bankruptcy petition upon which he used another person’s name, social security number, and other personal information not his own.  In the plea deal, the debtor waived his right to take a direct appeal then turned around and appealed his sentence.  Third Circuit held that debtor validly waived his right to appeal the sentence, and affirmed the sentence given by the District Court. 

Fourth Circuit
Where debtor essentially confirmed old debt, 
transfer was deemed for reasonably equivalent value  and 
not necessarily needed to be contemporaneous:

Callahan v. Osteen (In re Osteen), No. 3:12-CV-00023 (W.D. Va. Oct. 19, 2012).
District Court affirmed the Bankruptcy Court’s decision dismissing a Chapter 7 Trustee’s avoidance action brought under Section 548.  Chapter 7 Trustee sought to avoid a pre-petition transfer where the Debtors granted to the Lender a  a confirmatory deed in trust on their residence, due to the lender having lost the original.   The documents were recorded on July 2009.  In October 2009, the Debtors filed Chapter 13 and then later converted their case to Chapter 7. Chapter 7 trustee tried unsuccessfully to avoid the transfer.  While the parties agreed that the Debtors were insolvent at the time of the transfer, the Debtors and Lender disputed the Trustee's contentions that the transfer was not an exchange of reasonably equivalent value.  Bankruptcy Court held that consideration may consist of securing antecedent debt and that the exchange of value need not be contemporaneous.  Bankruptcy Court focused on whether the value exchanged by collateralizing past debt constituted ‘reasonably equivalent value’ by viewing the totality of the circumstances.  Court held that while collateralization of past debt is not automatically deemed reasonably equivalent value, in this instance the Debtors’ and Lender’s exchange was for reasonably equivalent value.  

Ch. 13 Debtor's counsel fee app reduced where fee charged was too high for ordinary work:

Stephens, Boatwright, Cooper & Coleman, PC, v. Beskin, No. 3:12-CV-00020, 2012 (W.D. Va. Oct. 12, 2012).
District Court affirmed Bankruptcy Court awarding the Ch. 13 debtor's counsel less fees/costs than the fee application requested, awarding $3,779 instead of the $ 10,001 requested.   Debtor's counsel attributed many of the fees and costs incurred over the "no look" provision to six amended Chapter 13 plans and a lien avoidance action. Bankruptcy Court reviewed the fee application at issue under both 11 U.S.C. Section 330(a) and Fourth Circuit law on fee applications (i.e. the “Johnson Factors”). These are the twelve Johnson factors: 1. the time and labor spent; 2. novelty/difficulty; 3. skill required; 4. the attorney's opportunity costs in filing/prosecuting the litigation at issue; 5. customary fee for similar work; 6.  attorney's reasonable expectations at the commencement of the litigation at issue; 7. time limitations imposed by client or circumstance; 8. amount in controversy versus the results obtained; 9. experience and capabilities of debtor's counsel; 10. lack of desirability to other lawyers in the field; 11.the characteristics of this particular attorney/client relationship; and (12) attorneys' fees  in similar cases.  Essentially, the Bankruptcy Court found, and the District Court affirmed, that this was not the extraordinary Chapter 13 case warranting the fees requested, and that debtor's counsel spent too much time on drafting routine pleadings.

Default judgment was appropriate discovery sanction:

Zhang v. Greenfeld (In re Zhang), No. 12-CV-1287 (D. Md. Oct. 19, 2012). 
District Court affirmed Bankruptcy Court’s order denying defendant's motion to vacate an order entering default judgment as a discovery sanctions. Defendants repeatedly failed to provide discovery to the Ch. 7 trustee.  In affirming, the District Court reviewed whether defendants acted in bad faith, the amount of prejudice the defendants' noncompliance caused the trustee as the discovery sought was material, deterrence, and whether less drastic sanctions were appropriate.  District Court found that based on the record before it, the Bankruptcy Court did not abuse its discretion in awarding the sanctions at issue, particularly since the withheld discovery prejudiced the Chapter 7 trustee. Finally, the defendants did not meet the legal standards for vacature of the order at issue.

Denial of stay pending appeal; denial based on injunctive relief factors:

Coler v. Draper, No. 12-CV-2020, (D. Md. Oct. 23, 2012).
District Court affirmed Bankruptcy Court's denial of stay pending appeal to the debtor.  As background, debtor filed Chapter 13 and a creditor moved to dismiss on bad faith grounds, asserting creditor's was the only debt at issue that debtor was in arrears and that the equity in debtor's realty would have satisfied the debt. The Bankruptcy Court dismissed the case as filed in bad faith, which debtor appealed.  Debtor moved for s stay pending appeal, which the Bankruptcy Court denied.  District Court reviewed debtor's request for a stay pending appeal under the factors for a preliminary injunction, as set forth in Winter v. National Res. Def. Council, Inc., 555 U.S. 7 (2008) i.e. debtor is likely to succeed on the merits of the underlying appeal, (2) debtor is likely to suffer irreparable harm in the absence of imposing a stay pending appeal, (3) the balance of equities tips in debtor's favor, and (4) imposition of  the stay pending appeal would serve the public interest.  In considering the merits of the underlying appeal, District Court found that the debtor's  Chapter 13 filing was done solely to defeat the creditor's judgment at issue, which supports the Bankruptcy Court's findings of bad faith, and thus imposition of a stay pending appeal was not deserved because the debtor could not show that he was likely to succeed on the merits of the appeal.  Further, debtor did not show irreparable harm since the debtor had not changed his lifestyle before or after the bankruptcy filing, so the dismissal of the chapter 13 case was not "irreparable harm".

Bankruptcy Court's dismissal rather than conversion of Ch. 11 cases reversed on appeal as best interests of creditors should have been weighed;

Lakefront Investors LLC, et al. v. Clarkson, et al., No. 12-CV-0326, (D. Md. Oct. 26, 2012).
District Court reversed the Bankruptcy Court’s decision to dismiss two Chapter 11 cases rather than converting them, giving deference to Debtors' wishes to dismiss rather than convert, even thought eh Ch. 11 trustee appointed in the cases favored conversions. Bankruptcy Court gave deference to Debtors favoring dismissal, and that the Debtors' lenders were essentially the only creditors who would benefit from conversion, that the unsecureds would probably not receive a recovery and Debtors' belief that the pending adversary proceedings would not garner much money if successful.  Upon appeal by the lenders, District Court held that the Bankruptcy Court erred (as a matter of law) by not converting, finding that the focus should ONLY have been the "best interests of creditors and the estate", rather than deferring to Debtors' wishes. Further, Bankruptcy Court   The Bankruptcy Court should have also examined lender's rights in state court versus bankruptcy upon conversion.
Ninth Circuit:

False oath as to source and amount of income leads to denial of discharge: 

In re Cummings, (9th Cir. B.A.P.). 
BAP upheld the Bankruptcy Court’s decision denying debtors' discharge under Section 727(a)(4) as debtors knowingly and fraudulently made multiple false oaths relating to the source and amount of income. 

Don't wait 5 years to move for stay relief:

In re Mathon Fund, LLC, (9th Cir. B.A.P.).
BAP affirmed the Bankruptcy Court’s decision denying the motion for retroactive relief from the automatic stay under 11 U.S.C. Section 362(d)(1). Appellants failed to move for relief, waiting until five years after litigation began.

Issues of notice and reasonable delay to be examined upon remand in creditor's discharge action:

In re Diepholz, (9th Cir. B.A.P.).
BAP reversed and remanded re the Bankruptcy Court’s denial of the appellants’ (Debtors') motion to dismiss creditors’ 11 U.S.C. Section 523(a) adversary proceeding.  There was a question as to whether or not the creditors received timely notice due to misspellings on the original petition and the original petition having omitted certain creditors' names.  BAP found that that the Bankruptcy Court did not make specific findings of fact and conclusions of law regarding whether the mailbox rule applied to impute notice to creditors and should so make upon remand. The mailbox rule, if applied, may have warranted dismissal of creditors’ action.  Upon remand, Bankruptcy Court was also to find whether the creditors' delay in challenging discharge was reasonable.

Failure to raise issue prior to appeal results in waiver regarding equitable subordination:

In re Bishay, (9th Cir. B.A.P.).
BAP affirmed Bankruptcy Court’s decision that appellant waived his right to dispute equitable subordination applied when appellant did not raise the issue prior to appeal.  Even so,  BAP found that the Bankruptcy Court correctly determined that based on the evidence before it, a subordination agreement did exist anyway.

Debtor's missing 341(a) meeting results in dismissal:

In re Oliver, (9th Cir. B.A.P.).
BAP affirmed Bankruptcy Court’s dismissal of Chapter 13 case on the basis that the Ch. 13 debtor failed to attend the first Section 341(a) meeting without reasonable explanation.

Debtor's objection to POC overruled:

In re Green, 2012 (9th Cir. B.A.P.).
BAP affirmed the Bankruptcy Court’s denial of debtor’s objection to a proof of claim, debtor claiming that the creditor provided insufficient evidence regarding perfection of the creditor's asserted lien as the lower court properly examined and applied the correct UCC provision.

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