Fighting Back!

A couple filed for Chapter 7 relief under the bankruptcy code and discharged their debts.  Apparently ignoring all of this, Bank of America pursued the Humphreys after the bankruptcy case for a debt that was discharged, which violated the discharge injunction of 11 U.S.C. Section 524 of the bankruptcy code.  The bankruptcy court found that the bank contacted the Humphreys 38 times - even though the Humphreys and their lawyer told the bank to stop, that the debt had been discharged in bankruptcy. The Humphreys did not take this lightly, but rather went back into bankruptcy court and asked for relief.  The bankruptcy court judge awarded the Humphreys the legal fees they incurred ($2500) and awarded them an additional $10,000 for the distress the situation caused.

See In re James C. Humphrey, Jr., and Shannon L. Humphrey, 2012 Bankr. Lexis 1113, (Bankr. M.D. Fla. 3/24/12) (Arthur B. Briskman, Bankruptcy Judge).

Here's a summary of the case:

In re: JAMES C. HUMPHREY, JR. and SHANNON L. HUMPHREY, Debtors.

Case No. 6:10-bk-17756-ABB, Chapter 7

UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF FLORIDA, ORLANDO DIVISION

2012 Bankr. LEXIS 1113

March 14, 2012, Decided

OVERVIEW
: Chapter 7 debtors filed a motion to reopen their bankruptcy case and a motion seeking sanctions against a bank national association ("bank"), claiming that the bank violated 11 U.S.C.S. § 524(a) when its agents contacted the debtors after a debt they owed the bank's predecessor was discharged pursuant to 11 U.S.C.S. § 727 and demanded that the debtors pay the debt. The court held a hearing on the debtors' motion for sanctions.  The debtors declared bankruptcy in October 2010, that they listed a home loan servicing business as a secured creditor that was owed $153,598. The court sent notice of the debtors' bankruptcy case to the business; however, the business did not did not seek relief from the automatic stay or otherwise make an appearance in the debtors' case, and the debtors received a discharge pursuant to 11 U.S.C.S. § 727 in January 2011. A bank acquired the mortgage on the debtors' property and it agents contacted the debtors on 38 occasions after they received their discharge, demanding payment. The court found that the bank violated the discharge injunction that was imposed pursuant to 11 U.S.C.S. § 524(a) and caused the debtors emotional distress, and it awarded the debtors $10,000 in damages and 2,500 in attorney's fees. The bank's agents continued to contact the debtors after the bank was informed by the debtors and their attorney that the debt was discharged, and in doing so they willfully and intentionally violated the discharge injunction and acted in bad faith. The debtors' damages included significant aggravation, emotional distress, inconvenience, and attorney's fees.
DECISION: The court found that the debtors were entitled to an award of actual damages pursuant to 11 U.S.C.S. § 105(a) and the court's inherent power to hold parties in contempt of court, and it awarded the debtors $12,500 plus interest and enjoined the bank from taking any further collection action against the debtors.

Inherited IRA's are protected as an exempt asset under the Bankruptcy Code

Fifth Circuit, apparently the first Circuit Court to address this, ruled this week than an inherited IRA is an exempt asset:

In the matter of: JANICE ELAINE CHILTON; ROBERT GREGG CHILTON, Debtors. ROBERT GREGG CHILTON AND JANICE ELAINE CHILTON, Appellees, v. CHRISTOPHER MOSER, Appellant.
No. 11-40377
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
2012 U.S. App. LEXIS 5140

March 12, 2012, Filed
PRIOR HISTORY:  
Appeal from the United States United States District Court for the Eastern District of Texas.

Chilton v. Moser, 444 B.R. 548, 2011 U.S. Dist. Lexis 27002 (E.D. Tex. 2011).

PROCEDURAL POSTURE: Appellant Chapter 7 trustee sought judicial review of a decision by the United States United States District Court for the Eastern District of Texas to reverse a bankruptcy court's ruling that an inherited Individual Retirement Account (IRA) did not qualify for exemption under 11 U.S.C. Section 522(d)(12).

OVERVIEW: The question of whether an inherited IRA satisfied the two requirements of Section 522(d)(12) was a question of first impression for the United States Court of Appeals for the Fifth Circuit and its sister circuits. The $170,000 contained in the inherited IRA constituted retirement funds as that phrase was used in Section 522(d)(12). While the parties agreed that the debtors' inherited IRA was tax exempt, they disagreed over which section of the Internal Revenue Code rendered it exempt. The trustee contended that inherited IRAs were tax exempt pursuant to 26 U.S.C. Section 402(c)(11)(A). The debtors responded by arguing that the inherited IRA was tax exempt pursuant to 26 U.S.C. Section 408(e). Since the transfer of the IRA took place before the debtors filed for bankruptcy, the issue was which provision rendered the inherited IRA exempt from taxation subsequent to the transfer.  Section 408 rendered the inherited IRA  exempt from taxation following its transfer from the deceased to the debtors. Because Section 408 was one of the sections named in Section 522(d)(12), inherited IRAs are contained in an account that is exempt from taxation as that phrase is used in Section 522(d)(12).

OUTCOME: The judgment of the district court was affirmed.

Bankruptcy/Foreclosure Cases from the First Circuit, January 2012, Part Two

Pro se debtor’s appeal dismissed as moot:

(IN RE FOTIS FRANK MARMARINOS, a/k/a Fotis F. Marmarinos, a/k/a Fotis Marmarinos, a/k/a Fotis S. Marmarinos, a/k/a Fotios K. Marmarinos, a/k/a Fotios Marmarinos) FOTIS FRANK MARMARINOS, Appellant, v. MARK G. DEGIACOMO, Chapter 7 Trustee, Appellee, 2012 Bankr. LEXIS 337 (1^st Cir. BAP 1/31/2012).

Appeal from the United States Bankruptcy Court for the District of Massachusetts. Bankruptcy Case No. 10-13117-FJB. (Hon. Frank J. Bailey, U.S. Bankruptcy Judge).

PROCEDURAL POSTURE: The United States Bankruptcy Court for the District of Massachusetts authorized appellee Chapter 7 trustee to compromise certain claims against a credit union. Appellant debtor, acting pro se, challenged the bankruptcy court's decision.
OVERVIEW: The debtor owned real property encumbered by two mortgages held by the credit union, which obtained relief from the automatic stay to foreclose on the second mortgage. The credit union was the successful bidder at the foreclosure sale. The debtor then filed a complaint in state court against the credit union. The trustee filed a motion to compromise, which the bankruptcy court granted after overruling the debtor's objection. The court held that the appeal was moot. The debtor never sought a stay of the compromise order. Absent a stay, the trustee was entitled to rely on the order, and he executed a stipulation of dismissal which was filed in the state court action. The state court then dismissed the state court action and closed the case. Thus, the settlement between the trustee and the credit union had been fully consummated. In addition, the property had been sold to a third party. As a result, even if the court were to address the issues the debtor raised in his appeal, it could not fashion any meaningful relief. The court could not compel the state court to revive the state court action and it could not unwind the sale of the property to a third party.
OUTCOME: The court dismissed the appeal as moot.

District Court affirms fraudulent transfer of wife’s real property and personal property to husband’s former employer to pay husband’s embezzlement debt, examining (1) tracing, (2) constructive trusts, (3) whether Chapter 13 debtor can bring a  §548 action, and (4) reasonably equivalent value:

Georgina C. Heilman v. Habitech, Inc. and D. Bruce Wheeler, 2012 DNH 8; 2012 U.S. Dist. LEXIS 3344 (D.N.H. 1/11/12)(NOT FOR PUBLICATION)( Joseph A. DiClerico, Jr., District Judge).
OVERVIEW: Where a non-debtor husband embezzled funds from his employer and the husband and debtor wife transferred their home to the employer in an attempt to satisfy the embezzlement debt, the bankruptcy court did not clearly err in finding that the debtor did not receive reasonably equivalent value for the transfer of her interests because the employer failed to adequately trace the embezzled funds to the purchase of the home and specific improvements to the home.
OUTCOME: Affirmed.

DISCUSSION: During her Chapter 13 bankruptcy case, Georgina Heilman brought an adversary proceeding to avoid the transfer of certain property to Habitech, Inc. and D. Bruce Wheeler, contending the transfer was fraudulent under 11 U.S.C. § 548(a). The bankruptcy court granted Heilman's claim in part and avoided the transfer of her personal property and her interest, but not her husband's interest, in their house. Heilman appealed, arguing that the entire transfer, including the transfer of her husband's interest in the house, was fraudulent and should be avoided. Habitech and Wheeler filed a cross-appeal, arguing that the transfer of the property was not fraudulent.

Georgina Heilman and her husband, Robert, rented a house in Windham, New Hampshire, (the "Windham House") from 1995 until 2000. In August of 2000, Erin, the couple's daughter, purchased the Windham House. The Heilmans continued to reside in the house and paid Erin rent until February 2003, when Erin transferred the house to the Heilmans for $1.00. At the same time, the Heilmans obtained a mortgage for $175,000. Shortly thereafter, the Heilmans began renovating the Windham House, which included adding rooms and remodeling the kitchen. In the spring of 2005, the Heilmans obtained an $80,000 home equity line of credit. A few months later, they added a two-car garage with a bedroom to the Windham House. Beginning in January of 2000 and continuing throughout the Heilmans' purchase and improvements of the Windham House, Robert was employed by Habitech.

In the fall of 2007, Habitech discovered that Robert had been embezzling funds from the company for several years. In total, Robert embezzled between $700,000 and $1.1 million during his employment with the company. On October 12, 2007, D. Bruce Wheeler, the co-founder and principal of Habitech, along with an outside accountant and a private investigator, confronted Robert about the embezzlement. Robert admitted to embezzling an undisclosed amount of money over several years. Wheeler then asked Robert to transfer to Habitech the deed to the Windham House, as well as some of the Heilmans' personal property, as partial repayment of the embezzled funds.

Robert called Georgina that same day, and made arrangements to meet her at the Windham House later that evening. Georgina arrived home from work that night after 11:00 p.m., to find Robert, Wheeler, and the others waiting for her. Wheeler insinuated that Georgina's cooperation would be helpful in terms of Robert's potential criminal liability and both of their continuing health coverage. Wheeler and the others also gave Georgina the impression that they would not leave until the Heilmans transferred their property to Habitech. That night, Georgina signed a Quitclaim Deed and a document titled "Transfer of all Property." Both documents were executed in the Windham House and signed by a notary public.

Habitech represents that the "Transfer of all Property" document purported to transfer to Habitech "[a]ll of the property owned by [the Heilmans] . . . real and personal, tangible and intangible, contingent and non-contingent, including but expressly not limited to, all of the furnishings and other contents in the [Windham House]." Wheeler took a computer and several pieces of Georgina's jewelry that night, and Georgina delivered an additional piece of jewelry to him a few days later. Georgina was not implicated in, and had no knowledge of, Robert's embezzlement, and had no liability to Habitech.

On or about January 14, 2008, Georgina filed for bankruptcy under Chapter 13 of the Bankruptcy Code. On or about April 2, 2008, Georgina filed a complaint against Habitech and Wheeler (hereinafter, "Habitech"), seeking to avoid her transfer of property that she made on October 12, 2007, on the ground that it was a fraudulent transfer. Robert, who is currently incarcerated, moved to intervene shortly before the adversary proceeding was set to begin. The bankruptcy court denied the motion.

After a hearing, the bankruptcy court entered judgment in favor of Georgina on the fraudulent transfer claim and avoided the transfer of her personal property and furnishings, as well as her interest in the Windham House. This appeal and cross-appeal followed.

Although the parties did not address the issue, the court notes that § 548 authorizes a bankruptcy trustee to avoid a debtor's fraudulent transfer. Based on the language of the statute, Heilman, as the debtor, would not have standing to avoid a transfer under § 548. Habitech moved to dismiss the adversary proceeding on this ground. The bankruptcy court denied the motion, but the parties did not provide the court with a copy of the bankruptcy court's decision.11 U.S.C. § 522(h) gives a Chapter 13 debtor standing to avoid a fraudulent transfer under § 548 if certain conditions are met. See, e.g., In re Dickson, 655 F.3d 585, 592 (6th Cir. 2011). The court is unable to determine, based on the appellate record, whether Heilman meets those conditions. Because Habitech did not raise the issue on appeal, the court will assume, without deciding, that Heilman has standing to avoid the transfer of her interest in the property under § 522(h).

Because Robert is not a debtor, § 548 does not apply to his interest in the Windham House. The bankruptcy court properly did not make any ruling with respect to Robert's interest in the house. Therefore, the bankruptcy court's decision to avoid the transfer of Georgina's interest in the house does not apply to Robert's interest.

Heilman also argues that her interest in the Windham House was 100% because she and Robert held the house as tenants in the entirety. Therefore, she contends, the transfer of the entire house should be set aside as fraudulent.  A tenancy in the entirety gives each tenant a 100% interest in the property. See In re Snyder, 249 B.R. 40, 46 (B.A.P. 1st Cir. 2000). New Hampshire, however, does not recognize the ownership form of tenancy in the entirety. See Estate of Croteau v. Croteau, 143 N.H. 177, 180, 722 A.2d 464 (1998); see also Boissonnault v. Savage, 137 N.H. 229, 231, 625 A.2d 454 (1993). New Hampshire law provides that every conveyance of real estate made to two or more persons creates an estate in common or, if otherwise provided in the conveying deed, a joint tenancy. See Revised Statutes Annotated ("RSA") 477:18. Neither a tenant in common nor a joint tenant holds a 100% interest in the property. The Quitclaim Deed by which the Heilmans obtained the Windham House conveyed the house to them "as tenants by the Entirety." Under New Hampshire law, such language creates a joint tenancy. Therefore, Heilman held the Windham House as a joint tenant with her husband and did not have a 100% interest in the house.

Accordingly, the bankruptcy court's order avoiding the October 12, 2007, transfer of the Windham House applies to only Georgina's interest in the house, and not to Robert's. Because Georgina's interest in the Windham House was less than 100%, the bankruptcy court's order does not require avoidance of the entire transfer.

Habitech argues that it held a constructive trust on the Windham House at the time of the transfer, and that, therefore, Heilman did not have an interest in the house to transfer. Further, Habitech argues that even if Heilman did have an interest in the house, she received reasonably equivalent value for her

Habitech argues that it held the Windham House in a constructive trust at the time of the transfer because the house was purchased and renovated with funds Robert embezzled from Habitech. Based on its theory that it owned the house through a constructive trust, Habitech contends that Heilman cannot show that she had any interest in the house at the time of the transfer. Habitech asserts that the bankruptcy court erred in concluding that Heilman had an interest in the house for purposes of avoiding the transfer.  In the context of a bankruptcy proceeding, a party asserting a right to property based on a constructive trust must establish the elements of a constructive trust under state law and also trace the trust funds to the property. See In re Chew, 496 F.3d 11, 17 n.8 (1st Cir. 2007); Conn. Gen. Life Ins. Co. v. Univ. Ins. Co., 838 F.2d 612, 618-19 (1st Cir. 1988). The bankruptcy court did not address the elements of a constructive trust under New Hampshire law, and Habitech does not raise an issue with respect to those elements on appeal. Instead, the bankruptcy court concluded that Habitech failed to trace adequately the embezzled funds to the Windham House. Habitech argues that the bankruptcy court's factual findings do not support the conclusion.When funds subject to a constructive trust have been commingled with other property of the debtor, the party asserting rights as a trust beneficiary bears the burden of sufficiently tracing the trust funds to the property. Conn. Gen. Life, 838 F.2d at 618-19; see also In re Fin. Res. Mortg., Inc., 454 B.R. 6, 17 (Bankr. D.N.H. 2011). It is insufficient to show that the trustee of the constructive trust was enriched by the funds or that the funds generally added to the value of the trustee's estate. Conn. Gen. Life, 838 F.2d at 619. Instead, the trust funds "must be clearly traced and identified in specific property." Id. (internal quotation marks omitted); see also In re DeSteph, 2010 Bankr. LEXIS 1593, 2010 WL 2206983, at *11 (Bankr. D.N.H. May 26, 2010) (tracing requirement was not satisfied because plaintiff could not directly trace a down payment on a condominium back to embezzled funds as opposed to the debtor's own money). This is so because "the constructive trust encumbers the property only to the extent of the funds traceable from the alleged fraud."

The bankruptcy court noted that Habitech's constructive trust theory was an "after-the-fact rationalization[] of value for what was transferred." The court also noted that Habitech did not have a pre-petition judgment that established a constructive trust. Instead, Habitech was asserting the constructive trust theory in the bankruptcy proceeding.  Habitech argues that the bankruptcy court erred by ruling that a constructive trust had to have been in place by judgment before the bankruptcy is filed. Habitech is correct to the extent that under New Hampshire law, "[a] constructive trust arises at the time of the occurrence of the events giving rise to the duty to reconvey the property." Curtis Mfg. Co., Inc. v. Plasti-Clip Corp., 933 F. Supp. 94, 106 (D.N.H. 1995) (internal quotation marks and citation omitted). The bankruptcy court, however, stated only that absent a prior judgment of a constructive trust, Habitech is in the position of an unsecured  creditor and must demonstrate to the court the existence of a constructive trust.  Pertinent to the constructive trust theory, the bankruptcy court found that "[t]hrough the course of [Robert's] embezzlement[,] the funds that he took wrongfully from Habitech found their way into purchase and improvements to real estate, into vacations, into — into some other acquisitions." The bankruptcy court also found that the Heilmans' legitimate earnings were less than the amount of their expenditures during the period when Robert was embezzling funds from Habitech. Nevertheless, the court found that Georgina did not know about the money Robert embezzled. The court concluded that Habitech did not trace adequately the embezzled funds to the house.

Contrary to Habitech's argument on appeal, the bankruptcy court did not find that the Heilmans paid for the Windham House and the renovations with embezzled funds. At most, the court found that the embezzled funds were commingled with the Heilmans' earnings and that together the funds and earnings paid for the Heilmans' home, vacations, and other expenses. A finding of commingled funds puts the burden on Habitech to clearly trace the embezzled funds to the  house, which the bankruptcy court found Habitech failed to do. Habitech has not shown that the bankruptcy court's conclusion was based on clearly erroneous factual findings or on a legal error.

Habitech argues that even if Heilman's interest in the Windham House was free from a constructive trust, the transfer of all of Heilman's property, including her interest in the Windham House, was not fraudulent. Habitech contends that Heilman received reasonably equivalent value for the transfer."Determination of reasonably equivalent value under § 548(a)(1)(B) is a two-step process. The Court must first determine whether the debtor received value, and then examine whether the value is reasonably equivalent to what the debtor gave." In re Feeley, 429 B.R. 56, 63 (Bankr. D. Mass. 2010) (internal citation omitted); see also In re Nat'l Envtl. Sys. Corp., 111 B.R. 4, 12 (Bankr. D.N.H. 1989). The determination of whether consideration is reasonably equivalent value is a question of fact.

Here, the bankruptcy court determined that Heilman did not receive fair or adequate consideration for the transfer of her property and, therefore, did not receive reasonably equivalent value. Habitech asserts that the bankruptcy court erred because embezzled funds were used to pay for the purchase and renovations of the Windham House, and therefore, the transfer to Habitech merely offset the value of the embezzled funds.  As discussed above, Habitech failed to trace adequately the embezzled funds to the purchase and specific improvements to the Windham House. Therefore, Habitech cannot claim that the transfer of Heilman's interest back to Habitech is an offset of the value of the embezzled funds.

Habitech further argues that the transfer of all of Heilman's property was the satisfaction of an antecedent debt and therefore, should be considered reasonably equivalent value. The bankruptcy court found, however, that Heilman did not have any liability to Habitech and thus, did not have an antecedent debt to repay. Whether Robert had an antecedent debt is irrelevant, as "the payment of another's debt is held to be a transfer without fair consideration." Therefore, the bankruptcy court's determination that Heilman did not receive reasonably equivalent value for the transfer of her property to Habitech was not clearly erroneous or a legal error.

Chapter 11 case dismissed as debtor's post-petition income did not cover post-petition expenses and his real estate values were declining, all to the detriment of the secured creditor:

IN RE: OSCAR TORRES DE JESUS, 2012 Bankr. LEXIS 307 (Bankr. D.P. R. 1/23/12).
PROCEDURAL POSTURE: Debtor filed a petition under Chapter 11 of the Bankruptcy Code and operated a dairy farm and other businesses he owned as a debtor-in-possession. A bank that held secured claims against the debtor's property filed a motion seeking an order under 11 U.S.C.S. § 1112(b) that dismissed the debtor's case. The debtor opposed the bank's motion.
OVERVIEW: The debtor declared Chapter 11 bankruptcy in December 2010, and a bank that was the debtor's largest creditor asked the court to dismiss the debtor's case, claiming that the value of the debtor's property was declining and that the debtor had no prospect of reorganizing his businesses. The court found that there was sufficient cause under 11 U.S.C.S. § 1112(b)(4)(A) and (F) to dismiss the debtor's case, that there were no unusual circumstances that precluded dismissal, and that the case should not be converted to one under Chapter 7 of the Bankruptcy Code. Although the debtor was involved in several businesses, his largest business was dairy farming and that business was losing money. At the time the debtor declared bankruptcy, he owed the bank $12,041,132, and by the time the court heard the bank's motion, the value of his estate had been reduced to $6,318,000. The debtor had a monthly income of approximately $88,543 and average monthly expenses of $112,174, so he was still losing money, he had stopped making payments on debts he owed to two banks, and he had not timely filed all monthly reports he was required to file as a debtor-in-possession.
OUTCOME: The court granted the bank's motion.

JUDGE: Enrique S. Lamoutte Inclán, Chief, U.S. Bankruptcy Judge.

Filing dubious proof of claim does not violate Fair Debt Collection Practices Act;

No Rule 11 Sanctions without complying with the rule's "safe harbor" provision:

(In re: JOSE LUIS CLAUDIO, SR.) CLAUDIO v. LVNV FUNDING, LLC, 463 B.R. 190; 2012 Bankr. LEXIS 140 (Bankr. D. Mass. 1/13/12)(Henry J. Boroff, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff Chapter 13 debtor filed an adversary proceeding against defendant LLC, claiming that the LLC violated the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C.S. § 1692 et seq., when it filed two claims against his bankruptcy estate. The debtor filed a motion for sanctions under Fed. R. Bankr. P. 9011 and amended his complaint by adding a count seeking sanctions under Rule 9011. The LLC filed a motion to dismiss.
OVERVIEW: The debtor claimed that the LLC violated the FDCPA when it filed two claims against the debtor's bankruptcy estate that were time-barred under Massachusetts law, and he asked the court for an award of damages under the FDCPA and to impose sanctions on the LLC pursuant to Fed. R. Bankr. P. 9011. The court found that the LLC did not violate the FDCPA, and it refused to impose sanctions under Rule 9011. because the debtor did not give the LLC notice of the violation and 21 days to correct it before he asked for sanctions. Numerous federal courts had held that the FDCPA was inapplicable to the filing of proofs of claim in bankruptcy cases, regardless of whether the underlying claim was stale or invalid for any other reason, and debtor did not comply with Rule 9011(c)(1)(A), which required him to give the LLC notice of the violation and 21 days to correct it before he asked for sanctions. The court noted that the debtor had not filed an objection to the LLC's claims, pursuant to 11 U.S.C.S. § 502.
OUTCOME: The court granted the LLC's motion to dismiss and denied the debtor's motion for sanctions.

Bankruptcy/Foreclosure Cases from the First Circuit, January 2012, Part One

Debtor can waive right to rescind under TILA or MCCCDA; in any event, rescission untimely:

(IN RE: ANGELO DIVITTORIO) DIVITTORIO v. HSBC BANK USA, NA as Trustee on behalf of ACE Securities Corp. Home Equity Loan Trust and for registered holders of ACE Securities Corp. Home Equity Loan Trust, Series 2006-SD1, Asset-Backed-Pass Through Certificates, OCWEN LOAN SERVICING, LLC; INDYMAC FEDERAL BANK, 2012 U.S. App. LEXIS 248 (1^st Cir. 1/6/2012)(Before Justices Lipez, Ripple* and Howard, Circuit Judges [* Of the Seventh Circuit, sitting by designation]Opinion by Ripple).

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Edward F. Harrington, U.S. District Judge.DiVittorio v. HSBC Bank USA, N.A. (In re DiVittorio), 2011 U.S. Dist. LEXIS 5493 (D. Mass., Jan. 20, 2011)
DISPOSITION: AFFIRMED.

PROCEDURAL POSTURE: Debtor filed an adversary proceeding asserting a right to rescind a loan agreement because the disclosures made at closing did not comply with the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA). The bankruptcy court held that debtor had failed to state a claim for relief or, alternatively, had waived his right to rescind. The United States District Court for the District of Massachusetts affirmed. Debtor appealed.
OVERVIEW: The modification included a waiver clause. Debtor alleged that the bank violated the MCCCDA, specifically Mass. Gen. Laws ch. 140D, § 10, because the annual percentage rate set forth on the Truth in Lending disclosure was not calculated in conformity with regulations and that the disclosure significantly underestimated the finance charge for the loan and failed to specify the timing of the installment payments. Inter alia, the appellate court held that debtor waived any rights under the MCCCDA when he failed to seek to rescind the modification within four years as required by Mass. Gen. Laws ch. 140D § 10(f). Alternatively, because debtor's "right" to rescission by recoupment was not created by the MCCCDA, the requirements for waiver of unconditional rescission rights under those statutes simply did not apply to the waiver. Furthermore, given the guidance of counsel, the time for reflection, the reduction in interest rate obtained and the specific approval of the court, the policy concerns of the legislation were not frustrated by the waiver provision in the modification. Moreover, as a matter of law, debtor's waiver was knowing and voluntary.

The Federal Reserve Board has determined that [the MCCCDA] establishes requirements "substantially similar" to TILA's and thus has exempted credit transactions within Massachusetts from chapters two and four of the TILA; contained in those chapters is the statute of limitations for actions for damages and rescission. Therefore, Mr. DiVittorio's claim technically is brought under the MCCCDA. Nevertheless, the MCCCDA was "closely modeled" after the TILA and, in most respects, "mirrors its federal counterpart." Thus, "the MCCCDA should be construed in accordance with the TILA.  We do not believe that the Supreme Court's recent decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), affects the jurisdiction of the bankruptcy court to render a decision in this matter. Here, however, it first was necessary to resolve the validity of Mr. DiVittorio's claim under the MCCCDA to determine whether HSBC was entitled to relief from the automatic stay. 

On appeal, Mr. DiVittorio first argues that the district court erred in dismissing his complaint.

With respect to the summary judgment determination, Mr. DiVittorio submits that the bankruptcy court erred in holding that, by way of the Modification, he waived his rights to rescission. Alternatively, Mr. DiVittorio contends that, even if he waived his right to rescission, this court still must recognize the rescission of his brother and co-mortgagor. HSBC disagrees. It argues that Mr. DiVittorio executed a valid waiver of any rights to rescission that he may have had and, furthermore, that the actions of Mr. DiVittorio's brother are irrelevant to the issues before the court.

Waiver: 

Mr. DiVittorio contends that, by signing the Modification, he did not waive his rights to rescind the transaction. First, he claims that, because the TILA and the MCCCDA are consumer protection statutes, the rights to rescission provided in those laws only can be waived under very limited circumstances, which are not satisfied in the present case. Alternatively, he submits that the policies of the TILA and the MCCCDA would be thwarted by allowing waiver of rescission in these circumstances, especially where, as here, the waiver was not entered knowingly or voluntarily. Finally, Mr. DiVittorio argues that, even if he waived his right to rescission, we still must recognize the rescission of his brother and co-mortgagor.
Turning to Mr. DiVittorio's first contention, he maintains that the TILA and the MCCCDA allow for waiver of the right to rescission only under very limited circumstances. Mr. DiVittorio further argues that, because he did not waive his right under the circumstances provided for in the statute, and in the manner described in Regulation Z, the waiver incorporated into the Modification did not constitute a valid waiver of his rescission rights.

§ 1635(d) authorizes the Board to "prescribe regulations authorizing the modification or waiver of any rights created under this section." 15 U.S.C. § 1635(d) (emphasis added). The same is true with the Massachusetts analogue. However, the right to rescind created by § 1635(a) expires after three years. The MCCCDA, which employs the same operative language as the federal statute, see Mass. Gen. Laws ch. 140D § 10(f), and "should be construed in accordance with the TILA," Mr. DiVittorio, however, attempted to rescind the transaction more than six years after the consummation of the transaction.

Mr. DiVittorio next argues that recognizing his waiver would thwart the policies undergirding the TILA and the MCCCDA. The waiver of rights under the circumstances presented here does not "thwart the legislative policy which [the TILA] was designed to effectuate. TILA was designed to promote a uniform system of disclosures to allow consumers to make informed credit decisions. Here, the Modification, which included the waiver provision, was the product of lengthy negotiations. Furthermore, in exchange for his release, Mr. DiVittorio received a significant reduction in the interest rate over the term of the loan and avoided foreclosure of his property. Finally, the bankruptcy court approved the waiver. We believe that, given the guidance of counsel, the time for reflection, the reduction in interest rate obtained and the specific approval of the court, the policy concerns of TILA were not frustrated by the waiver provision in the Modification. Based on the totality of circumstances, we also agree with the bankruptcy court that, as a matter of law, Mr. DiVittorio's waiver was knowing and voluntary.

Third, both the motion to modify filed in the bankruptcy court and the Modification itself explicitly addressed issues related to loan documentation and origination. In the motion to modify, Mr. DiVittorio represented that he had "engaged in extensive negotiations regarding the subject original loan documentation including the original note and mortgage." Moreover, in the Modification, Mr. DiVittorio explicitly waived any claims "in connection with the making, closing, administration, collection or the enforcement by Ocwen of the loan documents, this modification or any other related agreements."

Finally, Mr. DiVittorio argues that, even if he waived his right to rescission in the Modification, the bankruptcy court was required to take notice of his brother's rescission. The bankruptcy court concluded that, because Joseph was not a plaintiff in the adversary proceeding, it need not consider the effect of his separate claim of rescission. We regularly have considered such perfunctory arguments to be waived. "It is not enough merely to mention a possible argument in the most skeletal way, leaving the court to do counsel's work, create the ossature for the argument, and put flesh on its bones."

Disclosures:
Even if Mr. DiVittorio had not waived his rescission rights when he agreed to the Modification, however, we would conclude that Mr. DiVittorio has failed to state a claim for relief under the TILA or the MCCCDA. Regulation Z requires that "[t]he creditor shall make the disclosures required by this subpart clearly and conspicuously in writing, in a form that the consumer may keep." 12 C.F.R. § 226.17(a)(1). Among the disclosures that must be made are the APR, see 12 C.F.R. § 226.18(e), the finance charge, see id. § 226.18(d), and the payment period, see 15 U.S.C. § 1638(a)(6); 12 C.F.R. § 226.18(g). Mr. DiVittorio believes that IndyMac's disclosures were deficient with respect to each of these requirements.

We conclude that Mr. DiVittorio waived any rights he had under the MCCCDA when he signed the Modification.  Alternatively, we believe that Mr. DiVittorio has failed to state a claim for relief under the MCCDA. The judgment is therefore affirmed.

Mortgage not avoided or subordinated as it was properly assigned;

Still waiting for Mass. Supreme Court to rule in Eaton as to whether the foreclosing party must also hold the note:

(In re: DAVID A. MARRON AND ROBIN H. SOROKO-MARRON) DAVID M. NICKLESS, TRUSTEE v. HSBC BANK USA, NATIONAL ASSOCIATION, AS INDENTURE TRUSTEE OF THE FIELDSTONE MORTGAGE INVESTMENT TRUST, SERIES 2005-2, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., U.S. BANCORP, AND U.S. BANK TRUST COMPANY, NATIONAL ASSOCIATION, 2012 Bankr. LEXIS 52 (Bankr. D. Mass. 1/9/12)(Melvin S. Hoffman, United States Bankruptcy Judge).

SUBSEQUENT HISTORY: Reconsideration denied by Nickless v. HSBC Bank USA, N.A. (In re Marron), 2012 Bankr. LEXIS 480 (Bankr. D. Mass., Feb. 13, 2012)

PROCEDURAL POSTURE: Defendants filed a motion to dismiss plaintiff Chapter 7 trustee's complaint, which sought avoidance or subordination of (i) a first mortgage originally given by the co-debtor to one of the defendants, the nominee for defendant mortgage company, (ii) a confirmatory mortgage from both debtors to defendant indenture trustee, as nominee for the mortgage company, and a second mortgage given by the co-debtor to the nominee.
OVERVIEW: The co-debtor executed two notes payable to the mortgage company in connection with the purchase of property. To secure her obligation, she granted the nominee a first and second mortgage. At the time of the mortgage transactions, title to the property stood in the names of both debtors as tenants by the entirety. The nominee later assigned the first mortgage to the indenture trustee. After the co-debtor defaulted, the indenture trustee obtained a state court judgment enforcing a settlement in which the debtors agreed to execute a confirmatory mortgage. After the debtors refused to sign, the attorney for the indenture trustee signed the confirmatory mortgage. The Chapter 7 trustee argued that the first mortgage and confirmatory mortgage were invalid because the mortgage company was not named as the grantee and never accepted them. The court held that the first mortgage absolutely identified a grantee, the nominee, and it was the nominee, not the mortgage company, which, if acceptance was necessary, would have been charged with that responsibility.
OUTCOME: The court granted defendants' motion.

Court ordered over-secured creditor to file an application for post-petition fees and expenses before ruling on them as actual and reasonable as part of the creditor’s proof of claim in the Chapter 13 case:

(IN RE: ROSA M. MELENDEZ TORRES), 2012 Bankr. LEXIS 121 (Bankr. D.P.R. 1/9/12)(ENRIQUE S. LAMOUTTE, United States Bankruptcy Judge).                 

PROCEDURAL POSTURE: A Chapter 13 debtor filed an amended objection to an amended proof of claim filed by a creditor following a remand from the United States Bankruptcy Appellate Panel for the First Circuit (BAP). 
OVERVIEW: Following a pretrial hearing, three issues remained in dispute: whether an oversecured creditor could claim post-petition fees and expenses in the proof of claim filed for amounts owed prepetition; whether attorney's fees and expenses incurred by the creditor in prosecuting an appeal were an administrative expense that could be claimed when the BAP did not award costs and expenses  to the prevailing party; and, assuming that the creditor could claim the administrative expenses, if the same were actual and reasonable. The creditor argued that the terms of a contract entitled it to the fees and expenses requested. The court disagreed, noting that in a Chapter 13 case, there was a distinction between claiming prepetition fees and expenses and post-petition fees and expenses. While prepetition fees and expenses were determined solely in accordance with the underlying agreement and applicable non-bankruptcy law and were not subject to the reasonableness standard required by the bankruptcy law, a request for post-petition fees and expenses had to comply with 11 U.S.C.S. § 506(b) and Fed. R. Bankr. P. 2016. The post-petition fees and expenses were subject to the actual and reasonable standard.

OUTCOME: The court ordered the creditor to file an application for post-petition fees and expenses pursuant to 11 U.S.C.S. § 506(b) and Fed. R. Bankr. P. 2016 within 14 days. The debtor and the Chapter 13 trustee were ordered to file an opposition within 21 days from its filing.

Debtor entitled to cost/fees where creditor filed complaint attacking her discharge without any discovery in advance of doing so, and did not comply with Rule 9 re “specificity”, nor did creditor attend 341(a) meeting;

Creditor made no “substantial” settlement offer to dispose of the matter:

(In re KIMBERLY A. CONANT)FIA CARD SERVICES, N.A., v. CONANT,  2012 Bankr. LEXIS 286 (Bankr. D. Mass. 1/23/12)(Joan N. Feeney, United States Bankruptcy Judge).

PROCEDURAL POSTURE: Counsel for defendant debtor filed an application for compensation pursuant to 11 U.S.C.S. § 523(d), requesting compensation for services in the sum of $10,683.75 and reimbursement of expenses in the sum of $45.98.
OVERVIEW: Plaintiff creditor alleged that debt owed it was non-dischargeable pursuant to § 523(a)(2)(A). The creditor later offered to dismiss the action for return of the $250 filing fee. The debtor filed a motion for summary judgment. In its objection to the motion, the creditor did not challenge the debtor's assertions that it did not conduct any discovery before filing its complaint or amended complaint, relying instead only on inferences from its internal records and the debtor's bankruptcy schedules. The court granted the debtor's motion. The court held that the creditor did not make a substantial settlement offer because, at the time the creditor proffered its offer, the debtor had incurred fees of $2,241.25 and would have had to advance an additional $250, in addition to reimbursing her counsel for the expenses it had incurred. The court concluded that the creditor's amended complaint was substantially unjustified and awarded most of the amount requested, slightly reducing the amount as requested because the time entries lacked specificity in a number of instances and the number of hours expended in preparing the summary judgment motion appeared to be somewhat excessive.
OUTCOME: The court approved attorneys' fees in the sum of $9,583.75 and costs in the sum of $45.98.

DISCUSSION:  According to the court in Sculler v. Rosen (In re Rosen), 151 B.R. 648, 655 (Bankr. E.D.N.Y. 1993), "There are three goals satisfied by Fed.R.Civ.P. 9(b): '(1) providing a defendant fair notice of plaintiff's claim, to enable preparation of a defense; (2) protecting a defendant from harm to his reputation or goodwill; and (3) reducing the number of strike suits.'" (citation omitted).  In her Motion for Summary Judgment, the Debtor stated: The Plaintiff failed to conduct a 2004 examination prior to the commencement of litigation, and declined to serve any discovery on Ms. Conant after the filing of the first Complaint up until the filing date [of] this motion. The discovery deadline expired on August 11, 2011. Since fraud claims involve the Defendant's state of mind, the Plaintiff should have conducted a minimal amount of discovery so that it may support its allegations of fraudulent intent or representations. This inaction by the Plaintiff is further evidence that this litigation is nothing other than a strike suit.

The Debtor also stated that the Plaintiff did not attend the section 341 meeting of creditors.

District Court can grant/condition dismissal of appeal:

RUTH E. RODRIGUEZ-BORGES on behalf of her minor daughter A.G.D.R., Appellant,

v. MANUEL A. DOMENECH RODRIGUEZ, et al, Appellee, 2012 U.S. Dist. LEXIS 3828 (D.P.R. 1/11/12)(Jay A. Garcia-Gregory, District Judge).

Appellant-Plaintiff Ruth Rodriguez-Borges ("Rodriguez-Borges") comes to us on appeal from an

opinion and order issued by the Bankruptcy Court on March 29, 2011. The lower court dismissed the case before its consideration pursuant to 11 U.S.C. § 305 and 28 U.S.C. § 1334 (c)(1), because the "controversy at hand [was] actually being litigated in the State Court." Before this appeal was fully briefed, however, Appellee-Defendant (the "Trustee"), ¹ petitioned the Court to disqualify Luis Melendez-Albizu as counsel for Rodriguez-Borges. After a flurry of motions, Rodriguez-Borges countered with a Motion for Sanctions against the Trustee and its Attorneys, on grounds that their petition did not show there was any conflict of interest present.

The day after filing her motion for sanctions, Rodriguez-Borges moved for voluntary dismissal without prejudice. According to Rodriguez-Borges's account, much of the instant appeal had been rendered moot by a state court resolution in the proceedings running parallel to the bankruptcy case. This statement was hotly disputed by the Trustee; supposedly, the state court resolution that rendered moot this appeal was issued by the state court more than a year ago, on October 8, 2010. Thus, the Trustee saw fit to petition this Court for sanctions against Rodriguez-Borges, for violations of Bankruptcy Rule 9011.
DISPOSITION: Before the Court then are the motions for sanctions and Rodriguez-Borges's Motion for Voluntary Dismissal. For the reasons stated below, the motions for sanctions are hereby DENIED,  and the motion for voluntary dismissal is GRANTED.

The Federal Rules of Bankruptcy Procedure govern the present petition for voluntary dismissal. Specifically, when an appeal is docketed before the district court, an appellant may move to dismiss the appeal by either a stipulation between the parties, or "on motion of the appellant on terms and conditions fixed by the district court." Fed. R. Bankr. P. 8001(c)(2). Here, Appellant Rodriguez-Borges has moved for voluntary dismissal without prejudice (Docket No. 34), and the Appellee has opposed, asking that the Court render the judgment with prejudice.  We note that the docket has been fattened not by arguments and motions on the merits, but rather by squabbles between the attorneys in this case. Rather than using its scarce resources to study the instant appeal, the Court has been forced to deal with the aforementioned disputes. Rarely should a court dismiss a case with prejudice when it has not had an opportunity to pass judgment on the underlying merits of a case. Pursuant to Bankruptcy Rule 8001, this Court has discretion to set the terms and conditions of Rodriguez-Borges's petition. In the sound exercise of its discretion, the Court finds that it is not proper to enter judgment on this appeal with prejudice.
Relief from judgment denied:

(IN RE: WILLIAM M. DANIELS) WARREN E. AGIN, CHAPTER 7 TRUSTEE, PLAINTIFF, v. WILLIAM M. DANIELS, 462 B.R. 356; 2012 Bankr. LEXIS 45 (Bankr. D. Mass. 1/5/12)( William C. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Before the court was defendant debtor's Motion for Relief from Judgment, based upon excusable neglect and newly discovered evidence, through which he sought relief from a judgment ordering him to turnover his interest in a profit sharing plan and two individual retirement accounts to plaintiff, the Chapter 7 trustee.
OVERVIEW: Debtor apparently sought relief from a portion of the decision wherein the court found that he "actively misrepresented material facts" and engaged in "a pattern of bad faith concealment." Debtor cited case law that when a party was blameless, his attorney's negligence qualified as a "mistake" or as "excusable neglect" under Fed. R. Civ. P. 60(b)(1). Despite being timely, debtor's Motion was riddled with problems that prevented it from getting off the ground. Before debtor could assert that a certain attorney's purported negligence constituted "excusable neglect" under Fed. R. Civ. P. 60(b)(1), he had to first address why a second attorney did not raise that argument in opposition to summary judgment. Second, debtor's claim of excusable neglect fell flat. Third, debtor's claim of "newly discovered evidence" was a nonstarter. Fourth, even assuming, arguendo, that the evidence debtor pointed to was actually "newly discovered," the knife cut both ways--it proved that debtor was aware that his schedules were inaccurate and filed them anyway.
OUTCOME: The Motion was denied.