Recent Cases from the First Circuit and BAP re Bankruptcy.

First Circuit reverses the BAP and agrees with the Bankruptcy Court that the construction debt was not discharged under § 523(a)(2)(A); 

Remanded to determine damages; 

First Circuit focuses on factual causation and legal causation, 

distinguishing between the "transaction" and the "contract".

Click here: USCA1 Opinion

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: We vacate the BAP's judgment and remand to that tribunal with directions that it, in turn, remand the case to the bankruptcy court for further proceedings consistent with this opinion. BACKGROUND: Sharfarz hired Goguen as a contractor for a home addition. The contract specified different construction phases, required Goguen to obtain the necessary town permits, required Sharfarz to make progress payments to Goguen totaling roughly $171,000 and set a completion. Sharfarz paid Goguen $25,693 as the first installment payment, and stressed why sticking to the schedule was so important to him. Later Goguen emailed Sharfarz that he had " filed" a building-permit application with the town and was " in wait mode”, which was not true and Goguen did his best to keep Sharfarz from finding that out. Unfortunately, the foundation would eventually crack— just as Sharfarz feared it would. Sharfarz continued making progress payments, even though Goguen made little progress. Sharfarz had paid Goguen the full contract price, and then some. Yet Goguen threatened not to finish the project unless he got more money. Sharfarz said no. Goguen walked. And Sharfarz had to pay other contractors $88,000 to finish the job. 

Sharfarz sued Goguen in Massachusetts state court, relying on certain consumer-protection laws. After entering a default judgment against him, a state judge held an evidentiary hearing to assess damages. Sharfarz testified there. But Goguen was a no-show, despite being notified about the proceeding. The state judge wrote that Goguen was " both deceptive and unfair, almost from the beginning and to the end," and that his " violations" had been " willful and knowing."  The state judge set Sharfarz's damages at $88,000, which he trebled to $264,000 as state law allowed, and set Sharfarz's attorney fees and costs at $8,745.50. Ultimately, then, the state judge awarded Sharfarz judgment in the amount of $272,745.50. 

Goguen filed for bankruptcy under Chapter 7. Sharfarz reacted by petitioning to have his judgment against Goguen declared nondischargeable, per 11 U.S.C. § 523(a)(2)(A).^[Both Sharfarz and Goguen (who represented himself) took the stand during the trial before the bankruptcy judge and the Court found in favor of Goguen. Goguen (now represented by counsel) appealed to the Bankruptcy Appellate Panel, which reversed. The whole case turned on causation— no one contested the other elements, the BAP said. And, the BAP correctly observed, causation here has two components. The first is cause in fact, which means that Goguen's misrepresentations must have " played a substantial part," and so were " a substantial factor," in affecting Sharfarz's " course of conduct that result[ed] in his loss." The second is legal cause, which means that Sharfarz's " loss" must have been one " reasonably ... expected to result from" his " reliance" on Goguen's misrepresentations. The bankruptcy judge did not differentiate between cause in fact and legal cause, the BAP noted. Noting that a comment to the Restatement says that " [i]f the misrepresentation has not in fact been relied upon by the recipient in entering into a transaction in which he suffers pecuniary loss, the misrepresentation is not in fact a cause of the loss under the rule stated."  The BAP held that the cause-in-fact rule required that Sharfarz show that Goguen's permit misrepresentations induced him to enter into the construction contract. True, the timing of the project " was critical to Sharfarz," and Goguen's lies " might have prevented Sharfarz from canceling the contract," the BAP wrote. But Goguen's misrepresentations " post-dated" the contract's signing and " so ... could not possibly have induced Sharfarz to enter into the contract in the first instance." Cause in fact was " absent" then, per the BAP. Same for legal cause, the BAP added, since Goguen could not have " foreseen" that Sharfarz would have to pay an extra $88,000 over the original contract price because he (Goguen) had " misrepresented the status of the permit application for a ten-week period" after the contract's signing-and, as a fallback, it was " foreseeable" that Goguen could have finished the project " in a timely, workman-like manner, even after lying about the permit, thereby preventing Sharfarz's pecuniary" loss. Wrapping up, the BAP explained that Goguen's " negligence in under-estimating" the project's cost and the resulting " breach of contract" may have " caused Sharfarz harm," but, the BAP said, debts arising from situations like that are not excepted from discharge under 11 U.S.C. § 523.  Sharfarz now appeals to us.

STANDARD OF REVIEW: In cases like this one we zero in on the bankruptcy judge's ruling, affording clear-error review to any fact-bound challenges and de novo review to any legal ones. See, e.g., In re Bank of New Eng. Corp., 364 F.3d 355, 361 (1st Cir.2004); In re Werthen, 329 F.3d 269, 272 (1st Cir.2003). We give the BAP's decision no formal deference, but we do draw on its expertise in bankruptcy matters. See, e.g., In re Bank of New Eng. Corp., 364 F.3d at 361; In re BankVest Capital Corp., 360 F.3d 291, 295 (1st Cir.2004). The parties' dispute here centers on causation, and we review a bankruptcy judge's causation finding for clear error— unless he applied the wrong legal standard, in which case our review is de novo. Also, because one of the Bankruptcy Code's chief aims is to give the deserving debtor a " fresh start," we read exceptions to dischargeability " narrowly." See, e.g., In re Spigel, 260 F.3d at 32 (internal quotation marks omitted). That means that a person in Sharfarz's shoes must show that his claim fits " squarely" within a specific exception set out in the Bankruptcy Code. See, e.g., id. (internal quotation marks omitted). And as the party seeking an exception to discharge, Sharfarz had the burden of proving nondischargeability by a preponderance of the evidence. See, e.g., Grogan v. Garner, 498 U.S. 279, 281, 287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The bankruptcy judge in his opinion did not home in on the differences between cause in fact and legal cause. Neither does Sharfarz in his brief. But our de novo review leads us to conclude that Sharfarz satisfied his causation burden.

Cause in Fact:  The cause-in-fact issue is fairly easy, given the bankruptcy judge's factual finding: had Goguen not lied to Sharfarz about the building-permit status, the judge stressed after canvassing the evidence, Sharfarz " would have canceled the construction contract" and gotten back " all or most" of the initial $25,693 payment. And given this finding, we have no trouble concluding that Goguen's deliberately-deceitful conduct played a " substantial" role, and thus was " a substantial factor," in shaping " the course of conduct that result[ed]" in Sharfarz's " loss" — meaning that we can put a check mark next to cause in fact on the causation list.  Transaction ... is a broader term than ‘ contract.’ It includes not only an " agreement" — like the initial contract between Sharfarz and Goguen— but also " an act" or " several acts or agreements between or among parties whereby a cause of action or alteration of legal rights occur." Understood this way (and, critically, Goguen gives us no reason to doubt this well-established understanding), the " transaction" here is Sharfarz's staying the course, allowing Goguen to proceed with the concrete pouring and continuing to pay Goguen even after Goguen repeatedly lied to him. Consequently, Goguen's pouncing on the fact that the lies came after the contract's formation gains him nothing as post-contract­ formation that fraud that induces the creditor not to exercise a right arising from the contract may make the debtor's debt nondischargeable.

Legal Cause:  Having dealt with cause in fact, we now turn to legal cause, which is a trickier matter. As we explained earlier, legal cause is largely a question of foreseeability— a concept that " shape[s] and delimit[s] a rational remedy: otherwise the chain of causation could be endless." Hindsight is always 20/20. And when events have run their course, it is easy to label " ‘ foreseeable’ " everything " that has in fact occurred" — but this we cannot do. Instead, taking our cue from the Restatement, we must see whether Sharfarz showed that Goguen's lies led to a " loss" that " might reasonably" have been " expected to result from the reliance." We conclude that he has. 

As Goguen strung Sharfarz along with lies about the permit application, Goguen could have reasonably foreseen that his deceit would delay the project, which would lead to his pouring the concrete in cold weather, which in turn would lead to the foundation's cracking. And there is something to that, given: (a) From September 2006 through November 2006, Goguen conned Sharfarz into thinking that he (Goguen) had applied for a building permit when in reality he had not. (b) During this 10-week stretch, Sharfarz worried almost to the point of obsession that project delays would result in Goguen's pouring the concrete in the cold, which, he feared, would result in the foundation's cracking if proper precautions were not taken. (c) Goguen also surely knew the risks related to pouring concrete in cold weather— a point plainly inferable both from his saying that contractors had to take prophylactic measures to prevent cracking in situations like the one here. (d) Common sense (not to mention judicial notice, if that were needed) confirms the danger of pouring concrete in cold weather— a danger recognized by courts and those in the field with some regularity and for years. (e) Goguen actually poured the concrete in " very cold weather" . And (f) the foundation in fact later cracked— all because of Goguen's cold-weather concrete pouring.The net result of this is that Sharfarz made a prima facie case for legal cause, and again,we stress that Sharfarz foresaw that, without adequate precautions, pouring concrete in cold weather could lead to cracking, and the record shows that Goguen did too; common knowledge and common sense (not contradicted by the evidence) suggest that Sharfarz's fear was reasonable; and his fear ultimately became a reality. So, to put the point in Restatement terms, Sharfarz's reliance on Goguen's misrepresentations resulted in a " loss" that could " reasonably" have been " expected" to occur " from the reliance" — indeed the loss here was expected, at least absent any chemical additive or other precautionary measure. See Restatement (Second) of Torts § 548A.  Sharfarz wins because he adequately proved causation and Goguen did not bear his burden of showing an intervening or superseding cause. Consequently, we reverse the BAP's decision reversing the bankruptcy judge's order. 

That leaves one loose end, however— and a serious one to boot.

The Nondischargeable Amount: At least some portion of Sharfarz's $88,000 in actual damages is attributable to the foundation's cracking. But we do not know what that number is, because the bankruptcy judge made no findings on that score, and on this issue a remand is necessary. But for a variety of reasons we do not think that Sharfarz's recovery should be capped at that amount, whatever it is. For starters, Sharfarz claimed that he paid Goguen extra money for an additional worker who was never hired; that he made progress payments to Goguen for work that Goguen said he had done but that was in fact not done; and that he paid Goguen for an electrical upgrade that was never performed. The bankruptcy judge made no findings regarding these allegations. But Sharfarz has not waived them, and the bankruptcy judge could well decide on remand that some part of Sharfarz's damages is traceable not to the foundation's cracking but to other reasonably-foreseeable consequences of Goguen's liesAlso, and importantly, the bankruptcy judge may have erred when he discharged the amount of Goguen's debt attributable to the state judge's trebling of damages and awarding of attorney fees and costs. True, Sharfarz has not appealed on this point. But given that Goguen will be free on remand to show that the nondischargeable amount is really less than $88,000, we see no reason why Sharfarz should not be allowed to show that the nondischargeable number is really more. Moreover, we have a fair amount of elbow room " to shape a remand in the interests of justice." And exercising this authority, we explicitly give the bankruptcy judge the go-ahead to take these matters up on remand. 

Income Tax Refunds are property of the bankruptcy estate, the Refunds may be exempted, and the Refunds (depending on timing) are not necessarily included in disposable income:

Click here: USBAP1 Opinion 11-074P

MATOS [Debtor], Appellant, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-074, (BAP 1^st Circuit Sept. 26, 2012) (Before Judges Boroff, Deasy, and Bailey)(Opinion by Deasy).   PROCEDURAL: Debtor  appeals from the bankruptcy court’s order sustaining Chapter 13 trustee’s  objection to the exemption in an income tax refund, and the order denying Debtor's motion for reconsideration.                                                                                                                            
HELD:  Reversed, Trustee failed to sustain his burden in objecting to the exemption.  SUMMARY: Debtor claimed an exemption in the Refund under § 522(d)(5). Trustee filed an objection arguing that it was not property of the estate because, as of the petition date, the Debtor was not yet entitled to receive a tax refund for the 2010 tax year; and, the Trustee also opposed the exemption on the grounds that it was inconsistent with the Debtor’s proposal to pay into the plan the tax refunds received during the life of the plan. Finally, the Trustee argued that tax refunds received during the life of the plan, including the one for the 2010 tax period is disposable income to be devoted into the plan as per the Chapter 13 case of In re Padilla, Bankruptcy No. 07-07495-ESL.” See In re Padilla, No. 07-07495 ESL, 2009 WL 2898837 (Bankr. D.P.R. Jun. 23, 2009)(sustaining plan objection and ruling future tax refunds were projected disposable income pursuant to§ 1325).                                                                                                                              

Debtor then filed another amended plan proposing to increase his plan payments by applying that portion of the Refund that was attributable to post-petition income, and that Income Tax refunds, that have not been exempted and thus property of the estate, will be devoted each year, as periodic payments, to the plan’s funding until plan completion. Debtor then filed an opposition to the Objection. He first argued that the Refund constituted property of his estate, and therefore was properly included on Schedule B and exempted on C. He also asserted that there was no inconsistency between the plan provisions and the claimed exemption, because the amended plan provided that all non-exempt tax refunds would be paid into the plan, and complied with In re Padilla, because it provided for payment of all “future” tax refunds that accumulate during the life of the plan. 

The bankruptcy court issued an order sustaining the Trustee’s Objection reasoning: Postpetition tax refunds are income of the debtor and property of the estate while the debtor is in chapter 13, and that the income tax refunds, as projected disposable income, are subject to the deductions in sections 1325(b)(2,3), but may not be exempt as the same are not property of the estate under 11 U.S.C. § 541(a); and, that if the debtor would prevail on the claimed exemption, then the court would have to deny confirmation for failure to meet the requirements of section 1325(b)(1) as the debtor would not be providing all of its disposable income to fund the plan.

Debtor argued that the bankruptcy court’s reasoning was problematic because the Trustee had not filed an objection to confirmation, and even if the bankruptcy court raised an objection sua sponte, the Debtor was not given an opportunity to respond. The Debtor asserted that the Trustee’s arguments related not to the validity of the Debtor’s exemption but rather to the Trustee’s potential objection to plan confirmation and that the former did not have any impact on the latter.

JURISDICTION & STANDARD OF REVIEW: Appeals of an Exemption Order or Order denying reconsideration are final orders subject to appeal. There are no disputed facts involved in the bankruptcy court’s decision to sustain the Objection; therefore, the Panel’s review of the Exemption Order is de novo.

ANALYSIS:  Regarding property of the estate, Section 541 only applies to the interests of a debtor in property as of the petition date, subject to the three inapplicable limited exceptions in   §541(a)(5).  Any interest in property, described in §541, that a chapter 13 debtor acquires post-petition becomes property of the estate under § 1306, including any “earnings from services performed by the debtor.” 11 U.S.C. § 1306(a)(1) & (a)(2). Property included in the bankruptcy estate by § 1306, however, is “in addition to the property specified in section 541.”  The Supreme Court has ruled that tax refunds arising from pre-petition earnings or losses are generally considered property of the estate under § 541, as they are “sufficiently rooted in the bankruptcy past” and do “not relate conceptually to future wages and it is not the equivalent of future wages.” Kokoszka v. Belford, 417 U.S. 642 (1974) (rejecting a chapter 7 debtor’s claim under the Bankruptcy Act that a tax refund on pre-petition earnings received postpetition were part of the debtor’s fresh start); see also Segal v. Rochelle, 382 U.S. 375 (1966) (ruling tax refund from loss-carryback refund claims on account of taxes paid prepetition was property of the chapter 7 estate). Although Segal and Kokoszka were both decided under the Bankruptcy Act, the results have not changed under the Bankruptcy Code.  

All tax refunds received by a chapter 13 debtor after the bankruptcy filing are also property of the estate pursuant to § 1306(a). On appeal, however, the Trustee argues that this conclusion does not alter the outcome because any tax refund received after the commencement of a chapter 13 case is disposable income that must be paid into the plan pursuant to § 1325(b) and, therefore, it cannot be subject to a claim of exemption. The Debtor disagrees.  Trustee asserted that the Debtor’s claimed exemption should not be allowed as it was inconsistent with his proposal to pay into the plan the tax refunds received during the life of the plan. This, too, is unavailing as the Debtor has volunteered to apply all of the Refund toward the amended Plan.  Lastly, the Trustee argued that “tax refunds received during the life of the plan, including the [Refund] is disposable income [] to be devoted into the plan as per the chapter 13 case of In re Padilla."

Although it did not address the first two arguments, in the Exemption Order the bankruptcy court agreed with the Trustee’s final argument, concluding that the Debtor could not exempt the Refund because it constituted “disposable income” that he was required to pay into the plan pursuant to §§ 1322(a)(1) and 1325(b)(1)(B). Both below and on appeal, the Debtor argues that the bankruptcy court erred in considering and adopting the Trustee’s arguments, because the issue before the court was the validity of an exemption and not confirmation of his plan. In this case, because the Trustee had not filed an objection to the Plan, he had not activated the provisions of § 1325(b) by the time the bankruptcy court ruled on the Objection. Accordingly, at the time the court ruled on the Objection, the issue of whether the Debtor was devoting all of his projected disposable income to the Plan was a hypothetical argument unrelated to whether the Debtor was entitled to claim an exemption in the Refund. Having so concluded, we need not decide whether the Debtor was entitled to claim an exemption in the portion of the Refund that was related to post-petition income and became property of the estate under §1306.  

RECONSIDERATION:  In his Motion for Reconsideration, the Debtor sought to alter or amend the Exemption Order pursuant to Fed. R. Civ. P. 59(e) (“Rule 59(e)”), which is made applicable to bankruptcy proceedings by Bankruptcy Rule 9023. Reconsideration of a judgment under Rule 59(e) is an extraordinary remedy, which is used sparingly and only when the need for justice outweighs the interests set forth by a final judgment. In re Schwartz, 409 B.R. at 250. “To meet the threshold requirements of a successful Rule 59(e) motion, the motion ‘must demonstrate the reason why the court should reconsider its prior decision and must set forth facts or law of a strongly convincing nature to induce the court to reverse its earlier decision.’” Id. (citations omitted). The moving party cannot use a Rule 59(e) motion to cure its procedural defects or to offer new evidence or raise arguments that could and should have been presented originally to the court. Id. (citations omitted). In order to be successful on a Rule 59(e) motion, the moving party must establish a manifest error of law or fact or must present newly discovered evidence. Id. (citations omitted); see also Kansky v. Coca-Cola Bottling Co. of New Eng., 492 F.3d 54, 60 (1st Cir. 2007). Rule 59(e) motions are generally denied because of the narrow purpose for which they are intended. Id. The Trustee argues that the Debtor failed to meet his burden under Rule 59(e) because he “failed to discuss, much less elaborate, what is the manifest error of law that warrants the reversal of the Order granting appellee’s objection to exemptions and of the Order denying appellant’s motion for reconsideration.” The Debtor, however, argued that it was error to sustain the Objection because the ruling was premised upon a projected disposable income analysis of the amended Plan despite the lack of a plan objection having been filed. We agree with the Debtor and therefore conclude that the bankruptcy court abused its discretion in denying reconsideration.

For a similar ruling, Click here: USBAP1 Opinion 11-075P See SANTIAGO, MORALES, Appellants, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-075 (BAP 1^st Circuit   September 26, 2012) (Before Boroff, Deasy, and Bailey, Opinion by Deasy). HELD: Reversed, Trustee failed to satisfy his burden of demonstrating that the Debtors’ claim of exemption was in error. Accordingly, the Objection and the Order cannot stand. SUMMARY: Debtors had exempted an income tax refund on their schedules, Chapter 13 Trustee objected to the exemption but did not object to their plan. Debtors argued that the refund was property of the estate pursuant to §§ 541(a) and 1306(a), and that they were entitled to an exemption under § 522(d)(5). The Debtors also argued that the Trustee had not met his burden of proving that they were not entitled to the exemption. According to the Debtors, the Trustee’s argument that the exemption should be denied because the Refund is income was not a valid reason to deny a claim of exemption.                                                                                                       
JURISDICTION & STANDARD OF REVIEW:  A bankruptcy court’s order granting or denying a debtor’s claimed exemption is a final order, which Debtors timely appealed. We note that the order confirming the plan does not render the matter on appeal moot thereby depriving us of jurisdiction. As the plan provides that any tax refunds that have not been exempted will be devoted to funding the plan, whether the Refund is exempt remains a justiciable issue.  As there are no disputed facts involved in the bankruptcy court’s decision to sustain the Objection, our review is de novo. DISCUSSION:  On appeal, the Debtors claim that the bankruptcy court made three errors of law in sustaining the Objection: (1) by ruling that the Refund is property of the estate by virtue of § 1306 and not by virtue of § 541; (2) by ruling that a chapter 13 debtor may not claim a tax refund attributable entirely to pre-petition earnings as exempt; and (3) by denying their claimed exemption under the facts of this case. The Supreme Court has ruled that tax refunds arising from pre-petition earnings or losses are generally considered property of the estate under § 541, as they are “sufficiently rooted in the bankruptcy past” and do “not relate conceptually to future wages and [are] not the equivalent of future wages.” Thus, and as the Trustee concedes on appeal, a debtor’s right to a tax refund that originates from pre-petition earnings is property of the bankruptcy estate under § 541. On appeal, however, the Trustee argues that because the Debtors received the Refund post-petition, it is not only property of the estate but post-petition income that they cannot exempt but rather must pay into their plan. The Debtors disagree. 

Although the Trustee had not filed a plan objection by the time he filed the Objection, perhaps he nonetheless raised the issue of projected disposable income in the Objection based upon case law that explains that by objecting to an exemption, the issue is preserved until a plan objection is filed. See, e.g., In re Springer, 338 B.R. 515, 519 (Bankr. N.D.Ga. 2005) (holding that reviewing courts can consider whether exempt property is disposable income if objecting party files timely objection to debtor’s exemption claim); In re Stephens, 265 B.R. 335, 338 n.1 (Bankr. M.D. Fla. 2001) (noting that an objecting party’s timely objection to debtor’s exemption claim preserves the issue of whether exempt property constitutes disposable income); In re Graham, 258 B.R. 286, 292 n.1 (Bankr. M.D. Fla. 2001) (ruling exempt asset could not be included in disposable income but explaining “rule may not control situations where an objection to a claimed exemption has been timely filed.”). Even if an exemption objection based upon § 1325(b) were a necessary placeholder, a procedural issue not before us, it would serve to reserve the issue until the chapter 13 trustee or unsecured creditor interposes an objection to the proposed plan. In this case, however, no party filed an objection to the plan and the bankruptcy court confirmed the unopposed plan before it ruled on the Objection. Accordingly, any arguments related to § 1325(b) were moot by the time the court issued the Order.  Having disposed of the two arguments the Trustee raised in the Objection, we conclude that the Trustee failed to satisfy his burden of demonstrating that the Debtors’ claim of exemption was in error. Accordingly, the Objection and the Order cannot stand. 

Oversecured creditor entitled to post-petition interest at default rate, and compounded;

Valuation date of collateral is flexible:

Click here: USBAP1 Opinion 11-079P

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 NOS. MB 11-079, (BAP 1^st Circuit October 1, 2012)(Before Haines, Deasy, and Tester, Opinion by Deasy).   HELD: We AFFIRM the Default Rate Calculation, REVERSE the 506(b) Order and the Prudential Claim Order, and REMAND.

SUMMARY: The Prudential Insurance Company of America appeals: (1) the October 4, 2011 order (the “506(b) Order”) granting, in part, and denying, in part, the Motion of The Prudential Insurance Company of America for an Order Authorizing the Application of Payments Received during the Chapter 11 Cases to Payment of Post-petition Interest Pursuant to Section 506(b) of the Bankruptcy Code; and (2) the Order Fixing Amount of Allowed Prudential Secured Claim as of October 4, 2011 (the “Prudential Claim Order”) entered by the bankruptcy court. The Debtors filed cross-appeals with respect to both orders, arguing that the bankruptcy court erred by awarding Prudential interest at the default rate (the “Default Rate Calculation”).  We AFFIRM in part, REVERSE in part, and REMAND both orders for further proceedings consistent with this opinion.

BACKGROUND:  Prudential filed a Motion for an Order Authorizing the Application of Payments Received During the Chapter 11 Cases to Payment of Post-petition Interest Pursuant to Section 506(b) of the Bankruptcy Code (the “506(b) Motion”), seeking a declaration that it was oversecured and, entitled under § 506(b) to recover post-petition interest from the petition date at the default rate set forth in loan documents as well as attorneys’ fees, costs, and charges. Prudential also sought to apply all post-petition payments received during the chapter 11 proceedings first to post-petition interest and then to the principal balance of its claim. Debtors opposed the 506(b) Motion, asserting that Prudential’s claim was undersecured as to SW Boston until the closing of the Hotel Sale, and was not then entitled to post-petition interest, fees and costs from the petition date. Further, the Debtors asserted that the default rate of interest should not be allowed as it was an unreasonable penalty and would be inequitable under the circumstances. After an evidentiary hearing, the bankruptcy court entered its 506(b) Order granting, in part, and denying, in part, the 506(b) Motion. In its Decision, the bankruptcy court found that Prudential first became oversecured and entitled to accrue postpetition interest from the date of the closing of the Hotel Sale at the default rate of interest. In so holding, the bankruptcy court, following precedent set forth by the Fifth Circuit in T-H New Orleans, applied a flexible approach as to the timing of the determination of Prudential’s secured status for § 506(b) purposes. The bankruptcy court rejected Prudential’s argument that it was entitled to post-petition interest from the petition date, finding that Prudential had not established that it was a fully secured creditor from the petition date forward. The bankruptcy court also determined that Prudential was entitled to post-petition interest at the default rate of 14.5% and that such rate was not a penalty. As to Prudential’s request under § 506(b) for reasonable attorneys’ fees, costs, and other charges, the bankruptcy court determined that Prudential had not met its burden of establishing that the fees and charges were authorized by the applicable loan documents, or that they were necessary and reasonable. In so holding, the bankruptcy court pointed out that Prudential had not introduced into evidence the applicable promissory note or mortgage that allegedly entitled it to recover fees, costs, and other charges, nor did it provide a statement or itemization of its fees and costs.  

In orders dated March 12, 2012, the BAP denied the motions to dismiss, reasoning that although the Plan has been substantially consummated, Prudential is willing to accept alternative forms of relief that would not require an unraveling of the reorganization, and reversal of the Plan confirmation would not adversely affect any innocent third parties.

JURISDICTION & STANDARD OF REVIEW:  The underlying decisions and orders of the bankruptcy court determined whether and in what amount Prudential was entitled to post-petition interest pursuant to § 506(b). Generally, a bankruptcy court’s order regarding a secured creditor’s entitlement to post-petition interest pursuant to § 506(b) is a final, reviewable order. Panel applies the clearly erroneous standard to findings of fact and de novo review to conclusions of law.

DISCUSSION:  Prudential argues that the bankruptcy court erred by awarding post-petition interest only from the date of the Hotel Sale, and that it was entitled to post-petition interest from the petition date because: (1) it was oversecured at confirmation; and/or (2) it was oversecured throughout the bankruptcy proceedings, as evidenced by the bankruptcy court’s findings in the Lift Stay Decision. Although Prudential argues generally that it is entitled to fees and expenses in addition to post-petition interest, it did not brief any issues relating to the bankruptcy court’s ruling that Prudential had not proven that the claimed fees and expenses were authorized by the loan documents and that they were necessary and reasonable. Therefore, any argument on the issue of post-petition fees and expenses is waived. Prudential also argues that the bankruptcy court erred by concluding that it was not entitled to accrue post-petition interest on a compounded basis.

In their cross-appeals, the Debtors argue that the bankruptcy court erred by awarding Prudential post-petition interest at the default rate. As the U.S. Supreme Court has made clear, under § 506(b), a creditor is unqualifiedly entitled to post-petition interest on its oversecured claim, whether or not the loan documents upon which the claim is based provide for such interest. According to § 506(b)’s express terms, a secured creditor can only accrue post-petition interest on its claim if it is oversecured and then only to the extent it is oversecured.

Thus, the first inquiry under § 506(b) is usually a determination of whether the creditor is oversecured. The creditor bears the burden of proving, by a preponderance of evidence, that its claim is oversecured, “to what extent, and for what period of time.” Valuations under § 506(a) are to be made “in light of the purpose of the valuation and of the proposed disposition or use of” the collateral. The parties do not dispute that some post-petition interest is due.

Thus, the question here is when should the valuation of the collateral and the claim occur for the purpose of determining a secured creditor’s entitlement to post-petition interest under § 506(b)?  Neither the Bankruptcy Code nor the Bankruptcy Rules define or establish the appropriate point in a reorganization proceeding for the valuation determination under § 506(a), and, as a result, several approaches have emerged. The majority of courts use a more flexible approach, looking to the circumstances of each case and the purpose of the valuation. They do not pick a specific point in time for the debt/value comparison, focusing instead on the matter before the court. This flexible approach was adopted by the Fifth Circuit in T-H New Orleans, supra. We agree with the flexible approach espoused in T-H New Orleans and as applied by Urban Communicators.

This case is similar to Urban Communicators in that the value of the secured collateral (primarily the Hotel and Residences) fluctuated during the case and the debt was reduced by adequate protection payments. In addition, an actual post-petition sale of a substantial portion of Prudential’s collateral occurred in an arm’s length transaction. Although the bankruptcy court cited both T-H New Orleans and In re Urban Communicators with approval in holding that the Hotel Sale was evidence establishing Prudential’s oversecured status, it did not follow the reasoning of Urban Communicators in applying that evidence under a flexible approach to determine the point in time to apply the evidentiary determination. We find that the bankruptcy court erred in not doing so. Under the rationale set forth in Urban Communicators, the Hotel Sale price is the best evidence of the value of the Hotel and establishes that Prudential was oversecured throughout these bankruptcy proceedings. In addition, whether the hypothetical stay relief value is used, or the actual later sale value is used, it appears that Prudential was fully secured from the petition date under the rationale in Urban Communicators, and by the statements of the bankruptcy court in the 506(b) Decision.

Bankruptcy Court erred in concluding that Prudential was not entitled to postpetition interest computed on a compounded basis because the loan documents did so provide: We conclude that the bankruptcy court erred in finding that the Construction Loan Agreement did not expressly provide for compound interest and in holding that Prudential was not entitled to post-petition interest computed on a compounded basis. “Compound interest is the periodic calculation of additional interest on the interest that has already come due.” Prejudgment interest rates are governed by state law. The general rule in Massachusetts is that in the absence of statutory or express agreement by the parties, interest is presumed to be simple interest. In Massachusetts, compound interest is generally disfavored.  The bankruptcy court denied compound interest because it found that the Construction Loan Agreement, which is governed by Massachusetts law, does not provide for compound interest either at the default rate or the non-default rate of interest. Prudential argues that the bankruptcy court erred because the Construction Loan Agreement expressly provides for compound interest in the definition of “Applicable Interest Rate,” which is incorporated into the definition of “Default Rate.” Prudential did not introduce into evidence the applicable promissory note or mortgage, so the only loan document before the bankruptcy court was the Construction Loan Agreement. Accordingly, the Construction Loan Agreement is the only evidence of the agreement between the parties regarding the calculation of interest and is sufficient evidence of an express agreement between the parties that compound interest would accrue on the Prudential Loan. The Debtors argue and cite authority that it is within a court’s discretion to allow compound interest in the absence of an express agreement if warranted by equitable considerations. However, the Debtors cite no authority for the assertion that a court has the discretion to deny compound interest where, as in this case, it is expressly provided for in the applicable contract between the parties.

Bankruptcy Court did not err in awarding Prudential postpetition interest at the default rate:  Debtors argue that the bankruptcy court erred in granting Prudential post-petition interest at the default rate set forth in the Construction Loan Agreement because the default rate constituted an unenforceable penalty under applicable Massachusetts law. Although § 506(b) entitles Prudential to recover post-petition interest on its claim, § 506(b) and the accompanying legislative history are silent as to the appropriate rate of interest. Thus, the appropriate rate of post-petition interest is within the limited discretion of the bankruptcy court. Most courts hold that entitlement to default interest is a matter of federal law. Under federal bankruptcy law, there is a presumption that an oversecured creditor is entitled to post-petition interest at the contractual default rate, provided that there are no equitable considerations that would compel a different result. We agree with those decisions. “The effect of the rebuttable presumption in favor of the contract rate is to impose upon the debtor the burden of proving that the equities favor allowing interest at a different rate.” The Loan Construction Agreement establishes a non-default rate of 9.50% and a default rate of 5% above the non-default rate. Section 2.3 of the Construction Loan Agreement provides that if an event of default (as defined in the agreement) has occurred, interest shall accrue at the default rate. There is no dispute that an event of default occurred. Therefore, there is a rebuttable presumption that Prudential is entitled to post-petition interest at the default rate, unless the Debtors can prove that there are equitable considerations that compel a different result. Several courts have identified a list of factors which may be considered, such as (i) there has been creditor misconduct; (ii) application of the contractual interest rate would cause harm to unsecured creditors; (iii) the contractual interest rate constitutes a penalty; or (iv) its application would impair the debtor’s fresh start.“The power to modify the contract rate based on notions of equity should be exercised sparingly and limited to situations where the secured creditor is guilty of misconduct, the application of the contractual interest rate would harm the unsecured creditors or impair the debtor’s fresh start or the contractual interest rate constitutes a penalty.” The debtor bears the burden of rebutting the presumption that the contract rate applies post-petition. The Debtors have not satisfied this burden.The Debtors and Prudential were sophisticated parties that entered into a $192.2 million loan agreement. Each was represented by counsel, and there is no evidence of overreaching. They agreed to allocate the risk of default by, among other things, including an unambiguous provision that increased the non-default rate by 5% in the event of a default. The Debtors’ appeal to equitable considerations has no merit.

Debtor may amend plan where valuation impacts it:
Click here: USBAP1 Opinion 11-087U 

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 1^st Circuit October 1, 2012)(Before Haines, Deasy, and Tester, Per Curiam).  Prudential Insurance Company of America appeals 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. The BAP’s prior opinion’s reversal alters 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, we will vacate the Confirmation Orders, and afford the Debtors an opportunity to amend the Plan’s terms to account for the increased amount of Prudential’s claim 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. 

Creditor who received defective notice of Ch. 7 case time barred under §§727(c), (d), and (e) to challenges debtor’s discharge, but not time barred under §523(a)(3);Bankruptcy Court exceeded scope of remand by dismissing Adv. Pro. when prior appellate review held that the creditor had already pled a claim under §523(a)(3):

Click here: USBAP1 Opinion 11-048P  

GONSALVES, Plaintiff-Appellant, v. BELICE [Debtor], Defendant, Appellee, BAP NO. MB 11-048, (BAP 1^st Cir. October 15, 2012) (Before Lamoutte, Haines, and Deasy, Opinion by Haines) [No brief filed for Appellee, Appellant Pro Se].                                                          PROCEDURAL:  Gonsalves, a pro se creditor, appeals: (1) the order granting the motion of Belice to dismiss Gonsalves’ adversary complaint; and (2) the order denying Gonsalves’ motion for relief from judgment.  As we conclude that the dismissal was not only beyond the scope of our prior remand but was also legal error, we will VACATE the orders and REMAND the matter for further proceedings consistent with this opinion.      

                                                  

DISCUSSION: Gonsalves obtained a state court judgment against Belice, his landlord. Shortly thereafter, Gonsalves was incarcerated. Next, Belice filed his chapter 7 petition listing 26 George St., New Bedford, MA as his mailing address. Belice listed Gonsalves as a creditor and provided the George Street address Gonsalves and misspelled both Gonsalves’ first and last names. The bankruptcy court sent all notices for Gonsalves to the George Street address, including the bar date for filing proofs of claims. The bankruptcy court entered Belice’s discharge order on June 27, 2008. On July 30, 2009, Gonsalves commenced an adversary proceeding seeking revocation of Belice’s discharge under §§ 727(c), (d), and (e) or, alternatively, a determination that his claim survived discharge via § 523(a). Gonsalves alleged he first learned of Belice’s bankruptcy on May 18, 2009, after commencing a collection action in state court. Gonsalves further alleged that when Belice filed for relief, he was aware that Gonsalves was not living at George Street as he had by then been incarcerated. Gonsalves alleged that, but for the lack of notice, he would have participated in Belice’s bankruptcy case. Belice moved to dismiss the complaint pursuant to Rule 12(b)(6), asserting that he had notified Gonsalves of his bankruptcy petition and that Gonsalves’ complaint was untimely. Gonsalves objected, reiterating that he first received notice of Belice’s bankruptcy on May 18, 2009 (too late to file a proof of claim or to file a timely dischargeability action). After hearing, the bankruptcy court overruled Gonsalves’ objection and granted the motion to dismiss. Gonsalves appealed to the Bankruptcy Appellate Panel. He contended that his complaint, which asserted that Belice committed fraud by listing him at an address he knew to be incorrect, stated a claim. We explained that the count for relief under § 727(d), which Gonsalves filed thirteen months after Belice’s discharge, was time-barred pursuant to § 727(e)(1). We therefore affirmed the bankruptcy court’s dismissal on the discharge revocation count. The BAP noted that although the bankruptcy court erred in dismissing the count for failure to state a claim, the error was harmless as the count was time-barred.

With respect to Gonsalves’ request for relief under § 523(a), we first addressed why we concluded he had stated a claim under § 523(a)(3). We then articulated the applicable standard for such a count:  As we have previously explained, the list of creditors “submitted by the debtor must therefore contain information reasonably calculated to provide notice to the creditor.” We conclude that a creditor has been duly scheduled and listed if the address provided by the debtor is sufficiently accurate to permit delivery by the United States Postal Service to the appropriate party.”); (“Case law is clear and consistent; the debtor is held to a standard of reasonable diligence in ascertaining and listing all creditors.”).“If the creditor is able to show that the address was inadequate for the purpose intended, the burden then shifts to the debtor to show that, notwithstanding the incorrect address, the ‘creditor had [timely] notice or actual knowledge of the case.’”). Creditor claimed defective notice, and accepting the facts Gonsalves set forth in his complaint and further pleadings as true, the address [Belice] used for Gonsalves was not reasonably calculated to provide notice.

As such, we conclude that Gonsalves’ complaint presented a plausible case for relief under § 523(a)(3). Therefore, it was error to dismiss this claim on the grounds that he failed to state a claim upon which relief can be granted.  On remand, Belice again sought dismissal under Rule 12(b)(6), this time based on his argument that Gonsalves 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. He erroneously contended that the one year limitation set by § 727(e) for discharge revocation actions applied to Gonsalves’ § 523(a)(3) claim. Gonsalves opposed the dismissal motion, acknowledging that he learned of the bankruptcy on May 18, 2009, but disputed the assertion that his complaint was untimely. Counsel for Belice was the only party to appear at the brief hearing on the motion to dismiss. After a brief question to counsel, the court granted Belice’s motion stating, “not having heard from the plaintiff – and we know where he is, and he could be in touch in any number of ways, I am going to grant [the] motion to dismiss.” Gonsalves timely appealed and obtained an order from the Panel staying the appeal until he could seek reconsideration of the dismissal under Rules 60(a) and (b).

Gonsalves moved for relief from judgment arguing that the dismissal was in error because he had, in fact, timely filed an opposition. The bankruptcy court denied his motion and, in a written opinion, held that although it indeed failed to consider Gonsalves’ opposition, such error was harmless because Gonsalves had failed to address the basis for Belice’s dismissal request. The bankruptcy court went on to recognize that Gonsalves’ allegation as to when he received notice would support his prayer for relief. Ultimately, however, the court explained it could not grant relief because Rule 60(a) and Rule 60(b) are not applicable to errors of law. Gonsalves timely appealed the order denying reconsideration.

JURISDICTION & STANDARD OF REVIEW: An order granting a motion to dismiss an adversary proceeding is a final order. Generally, an order denying relief from judgment under Rule 60 is considered a final, appealable order. The order granting dismissal and denying relief from that dismissal are final orders and the Panel has jurisdiction to hear these appeals.  “A bankruptcy court's determination that a proceeding should be dismissed is a legal conclusion subject to de novo review.” The denial of a motion for relief from judgment is reviewed for abuse of discretion.

FURTHER DISCUSSION: Gonsalves argues that because our 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. We agree. 

On remand, a party may not raise issues that “it could and should have litigated on the original appeal. With little exception, a court is required on remand to address only that which has been remanded. In Appeal I, we accepted the facts Gonsalves averred in his complaint as true and concluded that he had effectively alleged that Belice had used an incorrect address for him and, as a result, he had stated a plausible cause of action arising under § 523(a)(3). We remanded the matter for consideration of the merits of that count. We had no reason to address the timeliness of the § 523(a)(3) claim because there is no pertinent filing deadline for it. As the remand was confined to consideration of the merits of the § 523(a)(3) count, the bankruptcy court’s entertainment of a motion to dismiss based on timeliness violated the spirit, if not the letter of the remand, and was contrary to the law of the case. A motion to dismiss is confined to a review of the complaint’s allegations in view of the substantive requirements that would entitle the plaintiff to relief. It can go no farther. After Appeal I, the sufficiency of Gonsalves’ § 523(a)(3) claim had been raised, reviewed, and determined in his favor. As a result, we need not proceed to the legal and factual issues regarding the denial of the motion for relief from judgment. On remand the bankruptcy court must determine the factual underpinnings of Gonsalves’ allegations regarding the address Belice provided and the sufficiency of the notice thereby provided. 

Creditor failed to prove fraudulent intent leading Bankruptcy Court to grant Debtor's 52(c) motion;

Debtor not entitled to costs and fees as appeal was not frivolous; Appellate Court reviewed the requisites of a frivolous appeal:

Click here: USBAP1 Opinion 12-017U

BELLAS PAVERS, LLC, Plaintiff-Appellant, v. STEWART [Debtor], Defendant-Appellee, BAP NO. MB 12-017; (Before Lamoutte, Kornreich, and Cabán, Opinion by Cabán)(BAP 1^st Circuit  October 18, 2012).                                                                               PROCEDURAL: 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.  HELD: We AFFIRM.                                                                                                    
BACKGROUND:   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. Bellas brought an adversary proceeding against Stewart claiming that the outstanding debt to Bellas should not be discharged because it was based on fraud. Specifically, Bellas claimed that Stewart, when hiring Bellas as a masonry subcontractor, never intended to pay Bellas. Although Bellas did not identify any specific Bankruptcy Code sections in its complaint, its allegations of fraud suggested a claim under § 523(a)(2)(A). The bankruptcy court conducted a trial on March 23, 2012. 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.                                                                                                                  

JURISDICTION & STANDARD OF REVIEW:  On appeal, Bellas essentially challenges the bankruptcy court’s underlying decision to grant Stewart’s Rule 52(c) motion and enter judgment in favor of Stewart on the nondischargeability of the debt. Bellas did not, however, list the judgment on its notice of appeal.  In some circumstances, we have limited the scope of the appeal where the notice of appeal only names the post-judgment order and not the underlying judgment. Where the appellant’s intent to appeal the underlying judgment is clear, appellate courts in this circuit generally treat the appeal as encompassing both orders. Moreover, as the bankruptcy court gave no explanation for its denial of Bellas’ motion for a new trial under Rule 59(a), we have no reasonable basis for reviewing that decision and can reasonably infer that the bankruptcy court was simply affirming its prior judgment. Therefore, we consider both the order denying the motion for a new trial and the underlying judgment.  An order denying a motion for a new trial under Rule 59 is a final, appealable order. In addition, a bankruptcy court’s judgment regarding the non-dischargeability of a debtor’s obligations under § 523(a)(2) is a final appealable order. Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. An order denying a motion for a new trial pursuant to Rule 59(a) is reviewed for abuse of discretion. An abuse of discretion occurs when the trial court ignores a material factor deserving significant weight, relies upon an improper factor, or assesses all proper and no improper factors, but makes a serious mistake in weighing them. A bankruptcy court’s determination of whether a requisite element of a nondischargeability claim under § 523(a)(2) is present is a factual determination which is reviewed for clear error. “A finding of fact is clearly erroneous, although there is evidence to support it, when the reviewing court, after carefully examining all of the evidence, is ‘left with the definite and firm conviction that a mistake has been committed.’” Deference to the bankruptcy court’s factual findings is particularly appropriate on the intent issue “[b]ecause a determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debtor.”  

DISCUSSION:  A motion for new trial is governed by Rule 59(a), made applicable to bankruptcy cases by Bankruptcy Rule 9023. This rule provides that a court may grant a new trial after a nonjury trial “for any reason for which a rehearing has heretofore been granted in a suit in equity in federal court.” Furthermore, it provides that after a nonjury trial, a court may, on motion for a new trial, “open the judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law or make new ones, and direct the entry of a new judgment.” Fed. R. Civ. P. 59(a)(2). “A motion for a new trial in a nonjury case . . . should be based upon manifest error of law or mistake of fact, and a judgment should not be set aside except for substantial reasons.” Here, the bankruptcy court denied Bellas’ motion for a new trial without any explanation and we infer that the bankruptcy court simply affirmed its prior ruling. Thus, we must determine whether the bankruptcy court erred in granting Stewart’s Rule 52(c) motion and entering judgment in his favor on Bellas’ dischargeability complaint.  Rule 52(c) of the Federal Rules of Civil Procedure, made applicable to bankruptcy proceedings pursuant to Bankruptcy Rule 7052, provides: If a party has been fully heard on an issue during a nonjury trial and the court finds against the party on that issue, the court may enter judgment against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue. The court may, however, decline to render any judgment until the close of the evidence. A judgment on partial findings must be supported by findings of fact and conclusions of law as required by Rule 52(a). A court should, therefore, enter a judgment under Rule 52(c) “[w]hen a party has finished presenting evidence and that evidence is deemed by the [judge] insufficient to sustain the party’s position.”  A motion for judgment on partial findings should be granted, ‘where the plaintiff fails to make out a prima facie case, or despite a prima facie case, the court The court is not required to “‘draw any special inferences in the nonmovant’s favor, or consider the evidence in the light most favorable to the nonmoving party. Instead, the court must [weigh] the evidence, resolv[e] any conflicts, and decid[e] where the preponderance lies.’”  Section 523(a)(2)(A) excepts from discharge a debt of an individual debtor “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(A).

The bankruptcy court determined that it simply could not find fraudulent intent because Stewart’s evasion of payment started ten days after completion of the work, not from the beginning as required. There was nothing else in the record to indicate that Stewart’s promise was false, and the short time frame between the promise to pay and the completion of the project was not enough for the bankruptcy court to infer fraudulent intent. The evidence is consistent with the bankruptcy court’s finding that when Stewart entered into the contract with Bellas on behalf of Premier, he did, in fact, intend to pay Bellas. Moreover, Stewart’s subsequent conduct does not establish his fraudulent intent at the time he entered the contract. Although he failed to pay after the completion of the project, there is no evidence in the record that his lack of payment was based on a prior intention from the beginning not to pay.

The Motion for Damages and Costs:  Stewart has 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. Imposing sanctions under Bankruptcy Rule 8020 is a “two-step process.” We must determine: (1) whether the appeal is frivolous; and (2) whether the moving party has fulfilled the procedural requirements of Bankruptcy Rule 8020. Bankruptcy Rule 8020 requires that a party must request sanctions in a separately filed motion and that the person or party targeted by the motion or notice must be given notice and an opportunity to respond. Stewart filed a separate motion, served it on Bellas, and provided it with an opportunity to respond, which it did. Thus, the procedural requirements have been met. 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.  CONCLUSION: For the reasons set forth above, we conclude that the bankruptcy court did not abuse its discretion in denying the motion for a new trial, and that the bankruptcy court’s findings with respect to § 523(a)(2)(A) were not clearly erroneous. Therefore, we AFFIRM both the order denying the motion for a new trial and the judgment in favor of Stewart. We also DENY Stewart’s motion for sanctions.