Bankruptcy Decsions around the First Circuit: Last few cases in 2011.

Debtor had no exemption and only a contingent interest in her own Thrift Savings Plan when the funds were held in Custodia Legis, pursuant to a state court order:

In re LILLIAN M. O'NEAL, 2011 Bankr. LEXIS 4942 (Bankr. D. Mass. 12/16/11)(Joan N. Feeney, Bankruptcy Judge).

PROCEDURAL POSTURE: Debtor claimed an exemption, pursuant to 11 U.S.C. § 522(b)(3)(C), in her thrift savings plan (TSP) account funds, and in funds she had borrowed from the account which were held in an escrow account at the commencement of the case pursuant to an order of a state probate and family court. Creditor, the attorney for an opposing party in the state court litigation, asserted a claim to the funds based upon the state court's orders.
OVERVIEW: In the state court action, debtor had sought the rescission of a deed from her parents to her brother, who was represented by creditor attorney. The state court entered a judgment against the debtor in the sum of $32,630, plus attorney's fees, and enjoining her from withdrawing, transferring, encumbering or otherwise depleting assets contained in her TSP account until the judgment was paid. Debtor did not make any payments, but withdrew funds from her TSP account, and was found to be in contempt. The bankruptcy court found that any sums in the TSP account at the commencement of the case were not property of the bankruptcy estate. The state court order served to place the funds in custodia legis, thereby divesting the debtor of legal title to the funds. The debtor held only a contingent interest in those funds.

OUTCOME: The creditor's attorney's motion to enforce the prior order restore the escrow funds was granted, and debtor's claimed exemptions were overruled.

Entire Student Loans discharged, Court initially receptive to considering a partial discharge; Court did not require expert testimony as to Debtors’ medical condition:

(In re:Ackley, Debtors) Ackley v. Sallie Mae Student Loans, et al., 2011 Bankr. LEXIS 5051 (Bankr. D. Maine 12/23/11)(Louis H. Kornreich, Bankruptcy Judge).

MEMORANDUM OF DECISION
Kathleen and Terry Ackley seek to discharge all of their student loan obligations based upon undue hardship pursuant to 11 U.S. C. Section 523(a)(8)Following a day-long trial, it appeared that they might be able to pay a small portion of their student loan debt without undue hardship and that the balance would be discharged. This preliminary conclusion presented two issues: (a) whether the debtors' student loan obligations could be apportioned into dischargeable and nondischargeable claims; and, (b) if so, how such an apportionment should be accomplished. On the recommendation of counsel, the parties were invited to submit written arguments on these questions. Thoughtful memoranda were provided. However, upon the Court’s attempt to apply the law to the facts in this case, it became apparent that the payment of even a small portion of the student loan obligations would impose an undue hardship on the debtors. Thus it was the conclusion that all of the student loan obligations shall be discharged. Debtor was disabled and receiving social security disability; debtor’s wife was also in poor health but employed.


The First Circuit Bankruptcy Appellate Panel has adopted the totality of the circumstances test to measure undue hardship. See Bronsdon v. Edu. Credit. Mgt. Corp., 435 B.R. 791, 800 (1^st Cir. BA) 2010). This test has been applied routinely by this court and will be applied in this instance.  See, e.g., Kopf v. U.S. Dept. of Edu., (In re Kopf), 245 B.R. 731, 741 (Bankr. D. Me. 2000). Under this test, the court will look at (1) the debtor's past, present and reasonably reliable future financial resources; (2) the debtor's and his dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances. Bronsdon, 245 B.R. at 798.
Court accepted the debtors description of their physical condition without need for expert testimony, as has been required in other cases. Having weighed the debtors' past, present and future financial resources, their reasonable necessary living expenses, and other relevant facts and circumstances, particularly the debtors' age and current health issues, I conclude that excepting their educational loans from discharge would impose an undue hardship on them.

Creditor had standing for stay relief, showing chain of assignments, testimony as to allonges:

In re: PERRETTA, 2011 Bankr. LEXIS 4913 (Bankr. D.R.I. 12/16/11)(Arthur N. Votolato, Bankruptcy Judge).

OVERVIEW: In a Chapter 13 case, a secured creditor filed a motion for relief from stay in order to foreclose on the debtors' mortgage. The debtors objected on the ground that the creditor lacked standing to bring such a motion. The court stated that the creditor had established a colorable claim to property of the estate and thus had standing to request relief from stay. The creditor's witness had testified at length about the assignments of the mortgage, the industry-wide practice of the use of allonges, and the record-keeping practices of the creditor and its servicing agent. The witness's testimony, together with the recording of the assignments, easily established that the creditor had at least a colorable claim against the bankruptcy estate. The witness had fully addressed and explained the purported deficiencies in the signing or execution of the various allonges. Furthermore, under RI state law, an assignment of mortgage substantially following the form entitled "Assignment of Mortgage," when duly executed, had the force of granting title and interest in the mortgage to the assignee. Here, the form was substantially followed. The debtors here could not claim to have experienced any difficulty in ascertaining the party with whom they could negotiate their loan. They had listed the creditor's servicing agent in their Schedule D, and all of the assignments had been duly recorded.
Outcome: Motion for relief from the stay granted.

Creditors secured claim reduced, decision made on the record of dueling appraisals:

In re MAIOLINO,  2011 Bankr. LEXIS 5061 (Bankr. D.R.I. 12/22/11)(Arthur N. Votolato, Bankruptcy Judge).

DECISION AND ORDER MODIFYING SECURED CLAIM:  Heard on Debtor’s Francisco Maiolino's Motion to
Modify (i.e., reduce) the Secured Claim of Creditor JP Morgan Chase Bank, N.A. ("Chase") to the fair market value of Debtor's house on which Chase holds a mortgage. Debtor contends that the value of his house at 57-59 Corinth Street, Providence, Rhode Island, is $80,000. Chase places the value of the property at $97,000. The parties submitted a Joint Pre-Trial Order with exhibits including an opinion of value of $80,000 by Peter H. Hurley ("Hurley") for the Debtor, and an appraisal of $97,000 by Melissa M. Perrille ("Perrille") for Chase. It is stipulated that both witnesses are qualified as experts in real estate valuation, and the parties have submitted the matter for a decision based on the record, and without an evidentiary hearing.

Peter Hurley used the comparable (or comparative) sales approach in arriving at his opinion of value of the subject property, and Melissa Perrille used both the comparable sales approach and the income approach. Hurley and Perrille utilized different properties in this case, except for one point of agreement. Perrille used 232 Baker Street as a comparable rental property in applying her income approach, while Hurley used the same property as one of his comparable sales. Although their other examples differ, the appraisers agree that 232 Baker Street is similar to the Debtor's house. The Baker Street property sold for $80,000, on December 6, 2010. Upon careful consideration, all of the evidence supporting a value higher than $80,000 for the subject property was unpersuasive, and based on the appraisals and independent analysis of the evidence, this Court adopts $80,000 as the correct
estimate of the value of 57-59 Corinth Street.

OUTCOME:  Debtor’s 's Motion to Modify Chase's Secured Claim is granted.

Recent Decisions Regarding Bankruptcy & Foreclosure in the 1st Circuit (December 2011) Part 4 of 4

Court may enlarge the time set under local rule for an 11 U.S.C. Section 509(b) claim, for cause:

In re: J.J. DONOVAN AND SONS, INC., 2011 Bankr. LEXIS 5020 (Bankr. D. Mass. 12/22/11)(Henry J. Boroff, Bankruptcy Judge).

Before the Court is a "Motion For Leave to File Statement of Claim for Administrative Expense Pursuant to 11 U.S. C. SEction 503(b)(9) filed by A.L. Prime Energy Consultant, Inc. ("Prime"). This case presents an issue of first impression in this Circuit: whether a bankruptcy court has the discretion to allow the late filing of a request for payment of a claim asserting priority under Section 503(b)(9).  J.J. Donovan and Sons, Inc. (the "Debtor") owns and operates a fuel terminal. The Debtor delivers fuel and services heating equipment. Between April 11 and April 20, 2011, the Debtor ordered deliveries of fuel oil from Prime. A little over a week later, on April 29, the Debtor filed its voluntary Chapter 11 petition. The Section 341(a) meeting of creditors was originally scheduled for June 6, but was not held on that date. Prime filed the instant motion 65 days after that first date set for the meeting and 5 days after the deadline set by Local Rule 3002-1 filing Section 503(b)(9) claims. By its Motion, Prime requests the allowance of its late filed claim.  In response to Prime's Motion, Gulf Oil Limited Partnership ("Gulf") and the Chapter 11 Trustee timely filed an Opposition and Objection, respectively. At the hearing on the Motion, Gulf and the Chapter 11 Trustee contested both the characterization of Prime's claim as entitled to priority under Section 503(b)(9) as well as the Court's ability to permit the late filing of it. At the conclusion of the hearing, the Court articulated generally the two issues presented—the second conditioned upon the first: (1) whether the Section 503(b)(9)claim filing deadline set forth in Local Rule 3002-1 is subject to extension for excusable neglect; and (2) whether Prime has shown excusable neglect. Section 503(b) lists those claims eligible for administrative expense status. One such claim is: the value of any goods received by the debtor within 20 days before the date of commencement of the case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business. (503(b)(9))  While the Bankruptcy Code and the Bankruptcy Rules are silent as to when such a claim must be filed, Local Rule 3002-1 fills the void.

Bankruptcy Rule 9006 governs the computation, enlargement and reduction of time periods specified in other bankruptcy rules as well as "in the Federal Rules of Civil Procedure, in any local rule or court order, or in any statute that does not specify a method of computing time." Fed. R. Bankr. P. 9006(a)(emphasis supplied). Subsection (b) of the Rule instructs as to when and how those time periods may be enlarged.  This Court concludes that, while Local Rule 3002-1 affords the Court with the flexibility to set the deadline for the filing of Section 503(b)(9) claims, Bankruptcy Rule 9006(b) permits the Court to allow such a claim after the deadline, upon a showing of the claimant's excusable neglect.

Court personally views home to aid in value determination:

In re EDWARD J. BUCHER, 2011 Bankr. LEXIS 5060 (Bankr. D.R. I. 12/19/11)(Arthur N. Votolato, Bankruptcy Judge).

Debtor’s Motion to Modify (and reduce) the Secured Claim of Creditor RBS Citizens, N.A. ("Citizens") to the fair market value of the real property on which Citizens holds the mortgage. Bucher contends that the value of his house at 15 Seaview Court, Tiverton, Rhode Island is $175,000.  Citizens places the value of the property at $240,000.  Both experts used the comparable (or comparative) sales approach to estimate the value of the subject property. It is worth noting, and the parties agree, that in this case, similar sales are hard to find. The subject property is a 1950's Contemporary "California Modern" single family residence that apparently did not gain popularity in the Northeast, and which is unique among its neighboring homes. From the Court's standpoint, given the difficulty that the dearth of comparative sales presented for the appraisers, the ability to view the subject property turned out to be the most helpful factor in determining its fair market value, which the Court finds is $175,000.  Home was in considerable need of repair.  The longer the Court ponders the evidence, in an effort to reconcile the disparate opinions of value, the less confidence it has in what the bank's appraiser has to say, i.e., the bank's evidence in this matter ignores the visual and actual reality and the boundaries within which courts are expected to accept expert opinions, whatever they are.  Accordingly, the Court adopts $175,000 as the market value of a house.

Court determines value of creditor’s collateral and interest rate to be paid to arrive at confirmation:

In re WENTWORTH HILLS, LLC, and WENTWORTH HILLS PROPERTY OPERATOR, LLC, 2011 Bankr. LEXIS 4945 (Bankr. D. Mass. 12/16/11)(Not for Pub.)(Frank J. Bailey, Bankruptcy Judge).

OVERVIEW: The court determined the value of the realty and personalty. Both parties' appraisers ably supported their dramatically divergent positions, but the court determined that the value of the collateral was closer to the creditor’s position. The debtors’ risk factor satisfied the governing formula approach for the calculation of the interest rate under 11 U.S.C. Section 1129(b) (2)(A)(i)(II), and the plan was feasible under Section 1129(a)(11). The debtors' projections showed sufficient cash reserves to handle a one-time loss due to increased debt service, and in subsequent years, the debtors would operate at a small and slowly-growing profit after debt service. The plan was proposed in good faith under Section 1129(a)(3). The debtors tentatively but unsuccessfully explored avenues of compromise, and there was no harm to any creditor and no bad faith in the satisfaction of municipal tax liens in three years instead of four. The fact that the initial plan did not provide for an auction of the equity and did provide for the securing of a capital infusion was of no moment because Section 1129(a)(3)asked whether the plan at issue, not earlier iterations, was proposed in good faith.
OUTCOME: The court determined the value of the creditor's secured claim and overruled the objections to confirmation.

After death of Chapter 7 Debtor, Court determined which claims did or did not survive his death for the Trustee to pursue:

(IN RE: C.R. STONE CONCRETE CONTRACTORS, INC., DEBTOR)

JOSEPH BUTLER, CHAPTER 7 TRUSTEE OF THE ESTATE OF C.R. STONE CONCRETE CONTRACTORS, INC., PLAINTIFF, v. RICHARD ANDERSON, GILLIAN WELBY, JOHN MARINI, PLUMB HOUSE, INC., DALTON BUILDERS, INC., JOHN MARINI MANAGEMENT COMPANY, LENOX-NORWOOD LLC, AND THE FRAMING COMPANY, INC., 2011 Bankr. LEXIS 4970 (D. Mass. 12/19/11)(William C. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff bankruptcy trustee pursued an adversary proceeding against defendants, a principal of general contractors and others, asserting claims based on the defendants' alleged attempt to take over the business and property of the bankruptcy debtor which was a subcontractor. Upon the death of the principal, the trustee moved to substitute the executor of the principal's estate for the principal in the proceeding.

OVERVIEW: The trustee asserted claims for turnover, post-petition use of the debtor's property, fraudulent transfers, conversion, conspiracy, tortious interference with contractual and business relations, unfair and deceptive practices, violations of the automatic bankruptcy stay, equitable estoppel, and constructive trust. The executor contended that the claims did not survive the principal's death. The bankruptcy court first held that surviving claims for goods and personal property within the meaning of Mass. Gen. Laws ch. 228, § 1 included intangible assets of the debtor, and thus the trustee's claims for conversion, tortious interference with contract and business rights, and conspiracy survived the principal's death. However, the claim for unfair and deceptive practices survived only to the extent that it did not rely upon torts based on deceit, and the claims for equitable estoppel and subordination based upon fraud and misrepresentation abated upon the principal's death. Nonetheless, claims for turnover, postpetition misconduct, fraudulent transfers, and violations of the bankruptcy stay were remedial rather than penal in nature, and thus the claims survived the principal's death.

OUTCOME: The trustee's motion to substitute the executor for the principal was granted in part with regard to claims for turnover, postpetition use of the debtor's property, fraudulent transfers, conversion, conspiracy, interference with contractual and business relations, and violations of the automatic bankruptcy stay, and the motion was denied in part with regard to claims for unfair and deceptive practices, equitable estoppel, and constructive trust.

Debt determined to be nondischargeable based upon default judgment wherein plaintiff alleged debtor had stolen her property interest in a retirement account:

(IN RE: JAMES O. HALLET) REICH v. HALLET,  2011 Bankr. LEXIS 4992 (Bankr. D. Mass. 12/19/11)(William C. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff, the former wife of defendant Chapter 7 debtor, filed a adversary proceeding against defendant in which she sought a determination that a default judgment was nondischargeable under 11 U.S.C.S. § 523. The court, having denied both parties' motions for summary judgment, reconsidered its decision following plaintiff's request for a status conference.

OVERVIEW: After plaintiff filed a civil action alleging that defendant had stolen her property interest in a retirement account, a state court entered a default judgment against defendant. In its prior decision, the court had found that the default judgment, which was incorporated into a Qualified Domestic Relations Order (QDRO), satisfied the definition of larceny under § 523(a)(4). It had declined to enter summary judgment for plaintiff, however, because it had granted the parties relief from stay to return to the state court to clarify its orders. The court construed plaintiff's request for a status conference as a motion for relief from judgment under Fed. R. Civ. P. 60(b). It stated that for purposes of this adversary proceeding, it needed only to accept that defendant committed an act that satisfied the definition of larceny as that term was used in § 523(a)(4). Therefore, it was irrelevant whether a property interest had actually been transferred, because the QDRO found that one was stolen, and that was enough. The default judgment satisfied the "fully litigated" requirement of collateral estoppel. Thus, the debt was nondischargeable, and plaintiff was entitled to summary judgment.

OUTCOME: The court vacated its prior order in which it had denied plaintiff's motion for summary judgment. It entered summary judgment in favor of plaintiff and held that the debt was nondischargeable.

Prepetition, the Plaintiff filed a civil action in the Florida Circuit Court alleging that the Debtor had stolen her legally recognized property interest in the SRA Account.  The Debtor did not appear or defend against the Civil Action, and on May 9, 2003, Circuit Judge Traynor entered a Final Judgment in the amount of $98,192.45, including treble damages and attorney's fees, against the Debtor.  Further proceedings followed before Circuit Judge Alexander, resulting in him entering a QDRO incorporating the full amount of the Civil Judgment.

Discharge Challenge denied:

(In re HENRICKSEN) LaLONDE v. HENRICKSEN, 2011 Bankr. LEXIS 4943 (Bankr. D. Mass. 12/16/11)(Joan N. Feeney, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff creditor filed a "Complaint Objecting to Dischargeability of Indebtedness." She formulated two counts in her Complaint, which she captioned as follows: Willful and Malicious Injury (11 U.S.C.S. § 523(a)(6)); and Violation of Mass. Gen. Laws ch. 93A. She cited 11 U.S.C.S. § 523(a)(2)(A) in the second count. In her Complaint, plaintiff blurred the causes of action under § 523(a)(6), (a)(2)(A). Defendant debtor moved for summary judgment.

OVERVIEW: To prevail on her claims under either 11 U.S.C.S. § 523(a)(2)(A) or (a)(6), the creditor had to establish that she suffered damages of some sort that were either due to debtor's willful or malicious conduct or the result of his false representations or actual fraud. Debtor maintained that the issue of the creditor's damages was resolved by the Superior Court and collateral estoppel prevented relitigation of that issue which was a critical element of claims under either § 523(a)(2)(A) and (a)(6). For collateral estoppel to apply, the court had to conclude that the Superior Court's decision relative to the creditor's contractual damages was binding relative to her present claims. The court found that all the elements required to apply collateral estoppel were present in the instant case. Because the creditor failed to posit damages other than her attorney's fees, which were awarded pursuant to her Mass. Gen. Laws ch. 93A claim and not for any cause of action arising out of the construction contract itself, the court found that debtor established that there were no issues of material fact in dispute, Fed. R. Civ. P. 56(a).

OUTCOME: Debtor's motion for summary judgment was granted. Accordingly, the court entered judgment in favor of debtor and against plaintiff on all counts of plaintiff's Complaint.

Debtor could not avoid mortgage based on defect in property description:

(IN RE: ADAMS) WARREN E. AGIN, TRUSTEE v. JPMORGAN CHASE BANK, N.A., 2011 Bankr. LEXIS 4965 (Bankr. D. Mass. 12/16/11)(William c. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Defendant bank sought summary judgment on claims that plaintiff trustee was not entitled to avoid a mortgage granted by debtor based on an alleged defect in the mortgage's description of the property. Plaintiff had filed a complaint for a declaration that it might avoid that mortgage under 11 U.S.C.S. § 544(a) and recover the interest for the estate under 11 U.S.C.S. § 550(a) while defendant had counterclaimed for a like declaration in its favor.

OVERVIEW: The dispute related to supposed inconsistencies among descriptions of the real estate. Plaintiff argued that due to a purported conflict in property descriptions, the mortgage’s description was ambiguous and could not be construed against the bona fide purchaser’s interests. Defendant argued that the entire property was subject to the validly recorded mortgage and that the trustee was not entitled to avoid the mortgage because a hypothetical bona fide purchaser would take subject to the mortgage, reasoning that as plaintiff had constructive notice of the mortgage’s applicability to the entire property, plaintiff’s avoidance claim failed as a matter of law. The court agreed with defendant. Noting the provision under state law that a reference to a title deed in a property conveyance had the same effect as if the entire description in the deed had been copied into the conveyance, the court held that the descriptions were not inconsistent because both could be given effect at the same time. Since the deed’s property description was effectively incorporated by reference into the mortgage, the entire property was encumbered and defendant was entitled to judgment as a matter of law.

OUTCOME: The court held that defendant was entitled to summary judgment and ruled accordingly.

BAP upholds denial of discharge due to false statements and false oath:

(IN RE DONAHUE) WILLIAM K. HARRINGTON, U.S. Trustee v. DONAHUE, 2011 Bankr. LEXIS 4951 (BAP 1^st Cir. 12/20/11)(Not for Pub.)

PROCEDURAL POSTURE: Appellee United States Trustee brought an adversary proceeding against appellant bankruptcy debtors seeking a denial of the debtors' discharge under 11 U.S.C.S. § 727(a)(4)(A) based on the debtors' false statements in their schedules and statement of financial affairs. The debtors appealed the order of the U.S. Bankruptcy Court for the District of New Hampshire [Haines sitting] which granted the Trustee's motion for summary judgment.

OVERVIEW: The Trustee contended that the debtors misrepresented, among other things, that they owned real property which they in fact previously sold, but the debtors asserted that the omission was not the result of fraudulent intent. The bankruptcy court held that denial of the debtors' discharge was warranted based on the debtors' false accounts and oaths. The debtors failed to disclose the pre-petition transfer of the real property which was a material omission, at the very least the debtors acted with reckless indifference as to the accuracy of their disclosures, and the debtors only disclosed the transfer after the Trustee discovered the sale. Further, despite the debtors' assertion of excusable inadvertence, the debtors fraudulent intent could be inferred from the numerous, accumulated false statements and omissions such as omitting prior encumbrances against the property and failing to disclose rental income and sale proceeds from the property.

OUTCOME: The order granting the Trustee's motion for summary judgment was affirmed.

Magistrate's Report & Recommendation is that fees cannot be collected on a discharged debt:

DE GAETANO v. LAPINSKI, 2011 U.S. Dist. LEXIS 148842 (D. Maine 12/22/11)(Margaret J. Kravchuk, U.S. Magistrate Judge)

R&R: This matter was referred to me for a recommended decision on the issue of attorney fees, following a post-judgment disclosure proceeding wherein Digga Downeast, LLC, as trustee, was ordered to turn over to the judgment creditor a certain real estate parcel in Jonesport, Maine. I ordered the parties to supplement their original memoranda by addressing three separate issues: (1) how can DeGaetano obtain attorney fees from the judgment debtor for fees spent as the result of a disclosure proceeding against a third party, when the sole basis to award those fees would be pursuant to a note that was merged into a judgment and the judgment was subsequently discharged in bankruptcy; (2) pursuant to what authority is a trustee liable for attorney fees under a trustee disclosure process such as this one; and (3) how did the judgment debtors schedule the assets of the dissolved LLC during their bankruptcy proceedings. The judgment creditor now concedes that there is no basis for an award of post-judgment attorney fees against the trustee (Supp. Mem. at 3, Doc. No. 100: "The plaintiff withdraws its claims for additional attorneys' fees against Digga . . .") I now recommend that the Court deny the motion for an award of additional post-judgment attorney fees against John and Linda Lapinski.

Chapter 13 debtors could not lien strip 2nd mortgage due to valuation:

In re: SARNO, 2011 Bankr. LEXIS 5019 (12/20/11)(Melvin S. Hoffman, Bankruptcy Judge).

PROCEDURAL POSTURE: Second mortgage creditor filed an objection to confirmation of the chapter 13 debtors' plan, which proposed to strip off the second mortgage and to treat the creditor's claim of approximately $65,000 as a general unsecured claim. Debtors also moved to amend their schedule A to reflect treatment of the loan.

OVERVIEW: Debtors asserted that the current value of their residence was only $315,000, and that the principal balance due on their first mortgage was $333,599. The second mortgage creditor introduced its own appraisal evidence that, as of December 17, 2010, the home was worth $350,000. The court rejected debtors' assertion that the value at the time of plan confirmation was the proper benchmark, and held that the petition date was the proper time of valuation. The undisputed evidence established that the principal balance of the first mortgage loan on the debtors' home as of the bankruptcy petition date was no greater than $334,500, and that debtors failed to meet their burden of proof that, on the petition date their home was worth no more than $334,500. Thus, the second mortgage claim was immune from modification under 11 U.S.C.S. § 1322(b)(2). Although the second mortgagee's issuance of an IRS Form 1099-C to debtors was a mistake, the error had been promptly corrected and debtors had not suffered any adverse tax consequences.

OUTCOME: Debtors' motion to amend schedule A to their bankruptcy petition was denied; the second mortgage creditor's objection to the plan was sustained.

Recent Decisions Regarding Bankruptcy & Foreclosure in the 1st Circuit (December 2011) Part 3 of 4

BAP reaffirms that mortgagee did not violate discharge injunction by failing to foreclose on property the debtors had abandoned, the mortgagee failing to foreclose for business reasons as it was not cost effective to do so in this case:

(IN RE CANNING)CANNING v. BENEFICIAL MAINE, INC., HSBC MORTGAGE SERVICES, INC., and HSBC MORTGAGE CORP., 2011 Bankr. LEXIS 4756 (1^st Cir. BAP 12/12/11)(Before Judges Feeney, Tester & Hoffman, Opinion by Tester).

Appeal from the United States Bankruptcy Court for the District of Maine. (Hon. James B. Haines, Jr., U.S. Bankruptcy Judge). Canning v. Beneficial Me., Inc. (In re Canning), 442 B.R. 165, 2011 Bankr. LEXIS 540 (Bankr. D. Me., 2011)

PROCEDURAL POSTURE: Plaintiff debtors appealed from a judgment of the U.S. Bankruptcy Court for the District of Maine holding that defendants (collectively "mortgagee") did not violate the discharge injunction by refusing to foreclose or release its mortgage lien on debtors' residence. Debtors complaint below was brought under 11 U.S.C.S. §§ 105, 524(a)(2).
OVERVIEW: Debtors relied on In re Pratt to contend that the mortgagee's conduct effectively eradicated their right to surrender and indefinitely kept them from a fresh start. The Panel stated that it followed from Pratt that after debtors surrendered the Property, the mortgagee was not required to take possession. Thus, the bankruptcy court correctly concluded that the mortgagee did not violate the discharge injunction when it refused to foreclose. The surviving question was whether the mortgagee improperly failed to discharge its mortgage. Assessing the particular facts, the Panel could not conclude that there was a particular confluence of circumstances that rendered the mortgagee's refusal to discharge its mortgage tantamount to coercing payment of a discharged prepetition debt. Unlike Pratt, the record reflected that the Property had significant value, that the mortgagee did not suggest it would discharge the mortgage only upon the full payment of the loan, and that debtors were not incurring any attendant costs. Also, 11 U.S.C.S. § 524(a) was not a license for courts to go beyond the particular prohibitions specified in the statute to shield debtors from adverse contingencies.
OUTCOME: The judgment was affirmed.

Chapter 7 Trustee validly avoided Bank’s lien on debtor’s property, the Court rejecting Bank’s claims of equitable subrogation or reformation. Here, the Bank in a re-fi, failed to properly include both parcels as its collateral and mistakenly included only one of the two parcels in the re-financed mortgage (the fact that the old and the new mortgage referenced the property as having the same street adress does not change the outcome):

(IN RE TRASK, d/b/a Marsh River Steel) PASQUALE PERRINO, Chapter 7 Trustee v. BAC HOME LOANS SERVICING, 2011 Bankr. LEXIS 4799 (1^st Cir. BAP 12/15/11) (Before Judges Hillman, Boroff & Cabán, Opinion by Boroff).

Appeal from the United States Bankruptcy Court for the District of Maine. (Hon. Louis H. Kornreich, U.S. Bankruptcy Judge). Bankruptcy Case No. 09-11698-LHK, Adversary Proceeding No. 10-01005-LHK.

PROCEDURAL POSTURE: Defendant mortgage creditor appealed from a judgment of the U.S. Bankruptcy Court for the District of Maine in favor of plaintiff Chapter 7 trustee, and against the creditor as to their competing interests in certain real estate.
OVERVIEW: The creditor asserted an equitable interest in the subject real property arising from a mutual mistake when the correct property description in a prepetition mortgage now held by the creditor was omitted. The bankruptcy court concluded that the Trustee, given the status of a hypothetical lien creditor by 11 U.S.C.S. § 544(a), was an intervening party with an interest superior to the creditor's equitable claims. The creditor argued that the bankruptcy court erred as a matter of law in determining that, because the Trustee was an intervening party, the new mortgage should not be equitably reformed to express the intended agreement of the parties that the house be the mortgaged property. However, the Panel agreed with the bankruptcy court. The Panel concluded that the use of the same street address to describe two abutting parcels would not be sufficient to constitute inquiry notice. Second, and here more important, there was nothing in the record that supported the creditor's assertion that the old mortgage and the new mortgage did, in fact, contain the same street address. Finally, the Panel found that the doctrine of equitable subrogation was here inapplicable.
OUTCOME: The judgment was affirmed.

BAC Home Loans Servicing, LP ("BAC") appeals from a judgment of the United States Bankruptcy Court for the District of Maine in favor of Pasquale Perrino, chapter 7 trustee (the "Trustee"), and against BAC as to their competing interests in certain real estate. BAC asserts an equitable interest in the subject real property arising from a mutual mistake (among BAC's predecessor in interest and the Debtors, defined below) when the correct property description in a prepetition mortgage now held by BAC was omitted. The bankruptcy court concluded that the Trustee, given the status of a hypothetical lien creditor by § 544(a) of the Bankruptcy Code,2 was an intervening party with an interest superior to the equitable claims of BAC.

BACKGROUND:  Sara and Douglas Trask (the "Debtors") are record owners of an unimproved sixteen-acre lot in a subdivision in Winterport, Maine, known as "Lot #6, James R. Greene Subdivision, Map File 10, Page 224" ("Lot #6"). They are also record owners of an abutting 1.74-acre lot on which their residence is located (the "House").

In April 2007, the Debtors refinanced their first mortgage on the House ("Old Mortgage") with Home Loan Center, Inc. ("Home Loan"). By the refinancing, the previous mortgage loan was paid and the Old Mortgage was discharged. In one of two mortgage loans related to the refinancing, the Debtors executed and delivered to Home Loan a promissory note in the amount of $195,000.00. To secure the new note, the Debtors executed and delivered, inter alia, a mortgage (the "New Mortgage") to Mortgage Electronic Registration Systems, Inc., acting solely as nominee for Home Loan. The promissory note and the New Mortgage were subsequently assigned to BAC.   As part of the refinancing, the Debtors provided Home Loan with a second note in the amount of $25,450.00, payment of which was secured with a second mortgage having the same infirmity as the first. The second note and mortgage were not assigned to BAC and therefore are not at issue in this appeal.

Although the Old Mortgage described the intended collateral as the House, the New Mortgage erroneously employed the description for Lot #6. It is undisputed that both the Debtors and BAC's predecessor, Home Loan, intended the mortgaged property to be the House. The error was not discovered until shortly before the filing  of the bankruptcy case in the spring of 2009.

At a status conference immediately before the hearing, the parties agreed that BAC's equitable claim was valid as against the Debtors and that the Debtors were no longer asserting an exemption in their residence. As a result, the sole dispute at trial was between the trustee as an intervening lien creditor under § 544(a) and BAC as the holder of an equitable claim.

Equitable Reformation:  BAC argues that the bankruptcy court erred as a matter of law in determining that, because the Trustee was an intervening party, the New Mortgage should not be equitably reformed to express the intended agreement of the parties that the House be the mortgaged property.

The Power to Reform:  Bankruptcy courts are courts of equity. Katchen v. Landy, 382 U.S. 323, 336, 86 S. Ct. 467, 15 L. Ed. 2d 391 (1966); Thinking Machs. Corp. v. Mellon Finan. Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1028 (1st Cir. 1995). Accordingly, they have the power to reform written instruments, including deeds and mortgages, under applicable state law to effectuate the intent of the parties.6 Even as a court of equity, however, the bankruptcy court's discretion is limited and cannot be used in a manner inconsistent with the commands of the Bankruptcy Code. See In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 830-31 (1st Cir. 1990).

Although the Trustee's status is crafted by federal law, the effect of those rights against other parties claiming a competing interest is determined by applicable state law.  Thus, although a trustee's actual knowledge will not preclude bona fide status, constructive notice, as determined by state law, will "defeat the Trustee's rights under § 544(a)(3) just as such notice would defeat the rights of any bona fide purchaser of real property."

Under Maine law, a deed or mortgage may be reformed in equity if the petitioner shows a mutual mistake of fact. It is well settled, however, that the Maine courts will not exercise their power to reform documents if the result will prejudice third parties or if the rights of third parties have intervened.

As of the date of case commencement, the Trustee held all of the rights and powers of a judicial lien holder and/or hypothetical bona fide purchaser with respect to all of the Debtors' property. See 11 U.S.C. § 544(a).   Thus, pursuant to § 544(a), the Trustee may subordinate BAC's secured claim to the Debtors' estate if, under applicable state law, a hypothetical lien holder would have prevailed over the claim as of the date of the bankruptcy case filing.

Bankruptcy court decisions denying motions to reform deeds or mortgages based on a chapter 7 trustee's status as an intervening lienholder or bona fide purchaser under § 544(a) are legion. Indeed, it is difficult to identify a purpose for § 544(a) other than to achieve the result of which BAC complains. BAC argues, however, that the facts here provide a distinguishing factor: that is, matters of record giving even an intervening lien creditor or bona fide purchaser constructive notice of BAC's competing interest. This is the crux of BAC's argument; it contends that even the holder of an intervening interest would have had constructive notice of BAC's mortgage.

Generally, there are two kinds of notice: actual and constructive. The First Circuit explained in detail the different kinds of notice in Stern v. Continental Assurance Co. (In re Ryan), 851 F.2d 502 (1st Cir. 1988). It would seem that one might properly be said to have actual notice when he has information in regard to a fact, or information as to circumstances an investigation of which would lead him to information of such fact, while he might be said to have constructive notice when he is charged with notice by a statute or rule of law, irrespective of any information which he might have, actual notice thus involving a mental operation on the person sought to be charged, and constructive notice being independent of any mental operation on his part . . . . Constructive notice is an essential element of the land recording system: if a deed is properly recorded, all future purchasers have constructive knowledge of the deed.

If a party has knowledge of such facts as would lead a fair and prudent man, using ordinary caution, to make further inquiries, and he avoids the inquiry, he is chargeable with the notice of the facts which by ordinary diligence he would have ascertained. He has no right to shut his eyes against the light before him. He does a wrong not to heed the "signs and signals" seen by him. It may be well concluded that he is avoiding notice of that which he in reality believes or knows. Actual notice of facts which, to the mind of a prudent man, indicate notice — is proof of notice.

BAC maintains that inquiry notice is the same as actual notice for purpose of the Maine statute, and the Trustee should be held to have inquiry notice in this case. According to BAC, although the Old Mortgage included the property description for the House and the New Mortgage contained a property description for Lot #6, both mortgages described the mortgaged property as located at 51 Stream Road, Winterport, Maine, which BAC claims is the street address for the House. BAC contends that because the mortgages used a common street address but provided different property descriptions, any potential buyer would have been placed on inquiry notice of an irregularity in title, and an inquiry would have quickly revealed the error.  As the First Circuit noted in Ryan, "inquiry notice" is not really a third distinct type of notice, but a corollary of both actual and constructive notice. "Inquiry notice follows from the duty of a purchaser, when he has actual or constructive notice of facts which would lead a prudent person to suspect that another person might have an interest in the property, to conduct a further investigation of the facts."

The Trustee counters that reference to a street address in the body of a mortgage deed is irrelevant under Maine title law and would not place a purchaser on constructive or actual inquiry notice of a title problem that a reasonable person would investigate further. According to the Trustee, under Maine law, title is based upon the legal description of the parcel to be encumbered and street addresses are irrelevant to Maine title practice. "[A] description of land to be conveyed should be clear enough for a person who reads it to draw a sketch of it, either by the wording of the deed itself or by reference to the lot on a recorded plan . . ." Furthermore, "[t]o convey a piece of real estate, the description should identify that piece and no other." The Trustee also notes that there is nothing in the appellate record establishing that both mortgages employed the same street address.

We believe that the Trustee has the better of the argument for two distinct reasons. First, we conclude the use of the same street address to describe two abutting parcels would not be sufficient  to constitute inquiry notice. There was nothing in the New Mortgage that would have directed a judicial lien creditor or bona fide purchaser to any inquiry. What appeared of record was a description of property to which a street address was assigned. Street addresses are provided by local government, not title examiners, and may very well be combined for separate but adjoining parcels. And one of those parcels may be encumbered without changing the street address of the others. Consequently, it would not necessarily be apparent to a diligent title searcher that because the property description of Lot #6 used the same street address as the House, that description was in any way suspect.

Second, and here more important, there is nothing in the record that supports BAC's assertion that the Old Mortgage and the New Mortgage do, in fact, contain the same street address. Neither party included in the record copies of the Old Mortgage to demonstrate that the street address was the same as the New Mortgage, and the parties did not stipulate to any facts from which the trial court (or we) could rely in reaching that conclusion.  Accordingly, the fact on which BAC would have us base a conclusion as to inquiry notice has not been properly put before us by BAC.

Equitable Subrogation:  BAC also argues that the bankruptcy court erred as a matter of law in finding that the Trustee, as a lien creditor under § 544(a), holds a superior interest to an equitable subrogation interest claimed by BAC. According to BAC, when its predecessor extended a loan to the Debtors to pay off the Old Mortgage, it became the holder of the rights and remedies under that mortgage by subrogation with priority above all other interests.

The traditional doctrine of equitable subrogation "enables '[o]ne who pays, otherwise than as a volunteer, an obligation for which another is primarily liable,' to be 'given by equity the protection of any lien or other security for the payment of the debt to the creditor,' and to 'enforce such security against the principal debtor or collect the obligation from him.” The Supreme Judicial Court of Maine has stated that equitable subrogation is "a device adopted by equity to compel the ultimate discharge of an obligation by him who in good conscience ought to pay it."  It is "a concept derived from principles of restitution and unjust enrichment." Under the doctrine, when one, not a volunteer, loans money to another and takes a mortgage to discharge a first mortgage, it may be proper to apply the doctrine and to subrogate the lender to the discharged mortgage.  The doctrine requires that the equities of the parties be weighed and balanced. "Subrogation, itself a creature of equity, must be enforced with due regard for the rights, legal or equitable, of others. It should not be invoked so as to work injustice, or defeat a legal right, or to overthrow a superior or perhaps equal equity, or to displace an intervening right or title." The doctrine of equitable subrogation applies only when the party seeking to rely on the doctrine makes payment other than as a volunteer. BAC's predecessor may not have intended to take the wrong property as collateral, but it surely intended to make the instant loan and take the instant mortgage for security. It did so voluntarily. Accordingly, the doctrine of equitable subrogation is here inapplicable.

Bankruptcy Court used valuation date as the date of confirmation, rather than date of petition filing, for debtor to strip off second & third mortgage as wholly unsecured under Section 506:

In re: MARYANN LANDRY, 2011 Bankr. LEXIS 4861 (Bankr. D. Mass. 12/14/11)(Henry J. Boroff, Bankruptcy Judge).

PROCEDURAL POSTURE: In connection with a motion for relief from stay per 11 U.S.C.S. § 362 by movant creditor, a mortgagee, and the motion to avoid filed by debtor, issues arose as to the proper date for the valuation of debtor's residential property, the determination of which was relevant to whether debtor might avoid or strip off movant's interest, a second mortgage lien, under 11 U.S.C.S. § 1322(b) and 11 U.S.C.S. § 1325.
OVERVIEW: When the creditor argued that debtor lacked equity in the property, debtor, citing 11 U.S.C.S. § 522, replied that the creditor’s mortgage was wholly unsecured given the value of senior liens and her homestead exemption. Once the issue of property valuation was thus raised, the creditor argued that as the property’s value as of the date of filing exceeded the balance due on the first mortgage, avoidance of its second mortgage was prohibited by § 1322(b)(2), with debtor replying that whatever the value at the date of filing, since the asset’s current value was less than the first mortgage, the junior mortgages were properly stripped off. The court agreed with debtor that the relevant property value was the current value. After rejecting debtor’s § 522 claim on a finding that it did not apply to a real estate mortgage, the court held that because the purpose of the valuation was to determine the treatment of the property in debtor’s Chapter 13 plan, the appropriate date for valuation was not the date on which the Chapter 13 was filed but was the property’s current value. Thus, the current valuation was to be used in determining whether the second mortgage was wholly unsecured.
OUTCOME: The court held that the property was properly valued as of the present time, ordered debtor to file an amended Chapter 13 plan treating all but the first mortgage on the property as wholly unsecured, denying the motion to avoid for the time, and deferring a decision on the motion for stay.

Withdrawal of the reference prudent in light of the potential reach of Stern v. Marshall:

(In Re: SCHWARTZ) SCHWARTZ v. DEUTSCHE BANK , 2011 U.S. Dist. LEXIS 144470, (D. Mass. 12/15/11)(William G. Young, District Judge).

Pending before this Court is an appeal of the above action from the bankruptcy court pursuant to 28 U.S.C. § 158(a). The District of Massachusetts referred the case to the bankruptcy court pursuant to 28 U.S.C. § 157(a). This Court may "withdraw, in whole or in part, any case or proceeding" referred by the authority of 28 U.S.C. § 157 for cause. 28 U.S.C. § 157(d). The Court withdraws the reference for Counts II, IV, V, VI and VII to "preserve a higher interest.  Here, the Court withdraws the reference for these proceedings on these counts in the interest of judicial economy and to ensure that the adversary proceeding conforms with the constitutional requirements elucidated in Stern v. Marshall,     U.S.    , 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011). At this juncture, the Court expresses no opinion on Stern v. Marshall's reach. Rather, it simply appears to be the better part of valor to assume responsibility for the further course of these proceedings now. The careful work of the Bankruptcy Judge is, of course, entitled to all proper deference.  The Court affirms the bankruptcy court on Count III, Void Lien.