Bankruptcy Decisions 2012: The Year in Review for New Hampshire Bankruptcy Court

	OPINION SUMMARY Click on the case name below and it will take you to the full opinion on the court's web site.
12/20/12	Maville v. Maville (In re Maville), 2012 BNH 007 (granting partial summary judgment, holding that all the debtor's non-support, non-alimony obligations to his former spouse arising from divorce proceedings are excepted from discharge pursuant to 11 U.S.C. §523((a) (15), notwithstanding dictum in state court decision).
11/19/12	In re Moultonborough Hotel Group, LLC, 2012 BNH 006 (finding that the plan provision releasing claims against the debtor's principle and manager, pursuant to 11 U.S.C. §1123(b)(3)(A), was a reasonable exercise of business judgment by the debtor in possession, but denying confirmation because the proposed cramdown interest rate which provided for no upward risk adjustment from the current prime rate did not satisfy the requirements of 11 U.S.C. § 1129(b)(2)(A)(i) and the rationale of Till v. SCS Credit Corp, 541 U.S. 465 (2004).
07/31/12	In re Lambregtse, 2012 BNH 005 (denying motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) because (1) the complaint does not definitively establish that the plaintiff's claims are barred by laches, preemption, and exemption under RSA § 358-A, (2) the defendant failed to establish under res judicata that there was a final judgment on the merits of this complaint, or that the Bankruptcy Court determined the alleged stay violations or alleged violations of New Hampshire state law as part of the discharge order, and (3) the Court can reasonably infer from the facts of the complaint that the act of acquiring a Home Equity Line of Credit is for personal, family, or household purposes).
06/20/12	In re Bloom, 2012 BNH 004 (ruling in connection with a motion filed by the debtor’s former spouse seeking to enforce a final divorce decree, which entered postpetition, that (1) the former spouse was entitled to the net proceeds of property that had been sold during the course of the bankruptcy case not the gross proceeds, (2) the chapter 7 trustee was not entitled to surcharge the property awarded to the former spouse with the chapter 7 trustee’s attorney’s fees, and (3) property transferred to the former spouse would not be transferred free and clear of an attachment obtained prepetition by the debtor’s creditors).
05/11/12	In re Richall, 2012 BNH 003 (denying chapter 13 trustee's motion to dismiss case under 11 U.S.C. § 1325(a)(3) for lack of good faith, despite the "above median" debtors' proposing a sixty month plan with payments approximately one-half of their disposable because the debtors' plan provides for payment of all allowed unsecured claims in full in compliance with 11 U.S.C. § 1325(b)(1)(A), and in the absence of any evidence of inaccuracies in the computation of income or expenses or dishonesty in the bankruptcy process).
04/27/12	In re Egan, 2012 BNH 002 (holding that the Creditors do not hold validly perfected pre-judgment attachment liens on the Debtor’s property because they failed to domesticate foreign court order in a New Hampshire state court under the procedures proscribed in NH RSA § 524-A (the Uniform Enforcement of Foreign Judgments Act)).
02/29/12	Notinger v. Migliaccio (In re Fin. Res. Mortg., Inc.), 2012 BNH 001 (denying in part the defendants’ motion for summary judgment because the summary judgment record failed to establish that the transfers at issue, in the trustee’s claims under 11 U.S.C. §§ 544, 547, and 548, were not of “an interest of the debtor” in property since the defendants made no attempt to trace their funds although the record did establish the existence of a trust based upon the conduct of the parties). Opinions and the Opinion summaries are found at the court's web site of  Click here: US Bankruptcy Court ~ NH

Around the Circuits Regarding Recent Bankruptcy Cases.

“Cases in Review” highlights recent cases that may be of particular interest to consumer bankruptcy practitioners.  It is brought to you by  Consumer Bankruptcy Abstracts & Research (www.cbar.pro) and  the National Consumer Bankruptcy Rights Center (www.ncbrc.org).  

Attorney-client privilege: 

Issuing an opinion “in order to clarify the scope of the attorney-client privilege and the work-product doctrine regarding handwritten notes and comments made by debtors and their counsel on documents used to facilitate the filing of the petition, the Schedules and the statement of financial affairs (SOFA),” the Bankruptcy Court for the Southern District of Texas held that (1) a questionnaire

created by the debtors' counsel was protected both as an attorney-client communication and under the attorney work-product privilege; (2) a copy of the debtors’ original Schedule F containing their handwritten notes and comments was not protected by the attorney-client privilege; and (3) a copy of the debtors’ original Schedule F containing comments by the debtors' counsel was protected as attorney

work-product. In re McDowell, --- B.R. ----, 2012 WL 5837587 (Bankr. S.D. Tex. Nov.16, 2012).

Authority of court—Imposition of sanctions: Debtors’ counsel were sanctioned or disciplined in a number of cases. In In re Chang, 2012 WL 6019310 (D. Md. Nov. 26, 2012), a disciplinary panel recommended that an attorney be suspended from practice before the court for one year for her failure to supervise a former employee who altered credit counseling certificates that were filed in 11 cases in Maryland, as well as in other cases in Virginia and the District of Columbia. The employee, the court said,

“brought few, if any qualifications, to the position other than being a former Toyota car salesman.” In Schaffner v. U.S. Trustee, 2012 WL 5988804 (E.D. Ky. Nov. 29, 2012), the district court affirmed the permanent disbarment of a bankruptcy attorney who hired “a former client and convicted felon” who professed to have experience in bankruptcy matters. The employee began defrauding clients by accepting fees for their bankruptcy filings and pocketing the money; later, he absconded with a computer      

containing the bulk of the clients' information, including sensitive information such as Social Security numbers and birth dates. 

And in In re Maldonado, --- B.R. ----, 2012 WL 5516408 (Bankr. N.D. Ill. Nov. 13, 2012), the court held that an actual conflict of interest existed between a Chapter 13 debtor and the attorney who had represented the debtor in three prior Chapter 13 cases, and who was now representing him in the

debtor’s fourth bankruptcy case, where the debtor still owed the attorney a fee for his representation in one of the prior cases.

Chapter 13—Fee-only plans: Following the approach taken in In re Puffer, 674 F.3d 78 (1st Cir. 2012), the Bankruptcy Court for the Southern District of Indiana ruled that, while not all “fee only” Chapter 13 plans are per se filed in bad faith, the debtor has the “heavy burden” of demonstrating “special circumstances” to justify such a plan, and here the debtor failed to meet that burden. In re Platt, 2012 WL 5842899 (Bankr. S.D. Ind. Nov. 19, 2012).

Chapter 13—Projected disposable income: Reversing In re Scholz, 447 B.R. 887 (9th Cir. B.A.P. March 22, 2011), the Ninth Circuit Court of Appeals held that a Chapter 13 debtor’s benefits under the Railroad Retirement Act of 1974 (45 U.S.C. § 231 et seq.) are included in the calculation of the debtor’s projected disposable income. In re Scholz, 699 F.3d 1167 (9th Cir. Nov. 15, 2012).

Chapter 13—Projected disposable income: Agreeing with other courts on this issue, the Bankruptcy Court for the Middle District of Georgia held that a Chapter 13 plan satisfies Code § 1325(b) if unsecured claims will be paid in full, even if the claims could be paid in a shorter period of time if the debtor paid his full monthly disposable income in each plan payment. In re Ellis, 2012 WL 5865906 (Bankr. M.D. Ga. Nov.

16, 2012).

Chapter 13—Stripping lien—By debtor ineligible for discharge: Three courts held that a Chapter 13 debtor may strip a lien unsupported by value in the collateral even where the debtor is not eligible for a discharge. See In re Dolcemascolo, Case No. 7:12-cv-1300 (S.D. N.Y. Nov. 7, 2012); In re Little, Case No. 4:11-bk-73376 (Bankr. N.D. Cal. Nov. 29, 2012) (Bankruptcy Judge William J. Lafferty, III); and In re Elahi, 2012 WL 5305242 (Bankr. N.D. Cal. Oct. 25, 2012) (Bankruptcy Judge M. Elaine

Hammond). One court, however, embraced reasoning that would preclude a lien strip by a debtor ineligible for a discharge, although the case involved a different issue. See In re Stott, 2012 WL 5505065 (Bankr. D. Utah Nov. 13, 2012) (Bankruptcy Judge Joel T. Marker).

Chapter 13—Stripping lien—On basis of unsecured proof of claim: Where a secured creditor filed a proof of claim for an unsecured debt, the District Court for the Western District of Virginia, reversing the bankruptcy court, held that the Chapter 13 debtor could void the creditor’s lien under Code § 506(d). White v. FIA Card Services, N.A., 2012 WL 5426830 (W.D. Va. Nov. 7, 2012).

Dischargeability of debts—Tax debt—Meaning of “return”: Rejecting In re McCoy, 666 F.3d 924 (5th Cir. 2012), the Bankruptcy Court for the District of Colorado held that the untimeliness of an income tax return does not, in itself, render the document not a “return” for the purpose of Code § 523(a)(1). Instead, the court turned to the pre-BAPCPA Beard test and concluded, under the facts of the case, that

the debtor’s federal income tax returns for 2000 and 2001 each constituted a “return” under § 523(a)(1) even though the debtor filed the returns after the IRS had assessed the debtor’s tax liability for the corresponding year. In re Martin, --- B.R. ----, 2012 WL 5554611 (Bankr. D. Colo. Nov. 14, 2012).

Violation of automatic stay: Where an unsecured creditor of the Chapter 7 debtor called her nearly twice a day after she filed her bankruptcy petition, continuing through the morning of the hearing on the debtor’s motion for sanctions for violation of the automatic stay, the Bankruptcy Court for the Northern District of Illinois awarded the debtor $15,000 in punitive damages while stating that the court would

consider adding $500 per day that the harassment continued. In re Galutan, Case No.1:12-bk-31837 (Bankr. N.D. Ill. Nov. 16, 2012).

Violation of discharge injunction: Where the Chapter 7 debtor’s mortgage lender willfully violated the discharge injunction by continuing to call the debtor in an attempt to persuade her to enter into a loan modification as an alternative to foreclosure, and to thereby reinstate some or all of the discharged debt, the

Bankruptcy Court for the District of Oregon awarded the debtor $4,000 in emotional distress damages as well as reasonable attorney’s fees. In re Culpepper, 481 B.R. 650 (Bankr. D. Or. Nov. 5, 2012).

Divorce Obligations are NOT discharged through bankruptcy.

In a recent opinion issued by the New Hampshire Bankruptcy Court, (Honorable James B. Haines, Jr.  sitting in designation), the Court reiterated the parameters of what is, or is not, discharged through a chapter 7 bankruptcy case relevant to a divorce proceeding.  See Maville v. Maville (In re Maville), 2012 BNH 007 (Bankr. D.H. 2012)( Haines, J, sitting in designation).

Debts in the nature of alimony and child support are not discharged through a bankruptcy case.  Section 523(a)(5) of the Bankruptcy Code establishes that individual debtors will not be relieved of domestic support obligations; and, Section 101(14A) defines these to include debts in the nature of alimony, maintenance and support.  Prior to 2005, some obligations were discharged.  That changed with the amendments to the Bankruptcy Code in 2005.  Section 523(a)(15) now unqualifiedly provides that a property settlement obligation encompassed by that section is not discharged.  Maville, supra.

Click here for the full opinion from the Court's web site:

Click here: http://www.nhb.uscourts.gov/Opinions/Judge_Deasy/2012BNH007-Maville.pdf

Recent Decisions from the New Hampshire, Rhode Island, and Maine Bankruptcy Courts.

Court reviews factors to determine appropriate rate of interest at cramdown; 

Court reviews factors to determine approval of a settlement.

In re Moultonborough Hotel Group, LLC, 2012 BNH 006 (Bankr. D.N.H. 2012)(Deasy).

Before the court were two issues: 

(1) Where the interest rate paid on the secured creditor’s claim was sufficient to satisfy cramdown (it was not), reviewing that cramdown requires the creditor retain its lien and receive deferred cash payments equal to the present value of its claim.  The correct rate of interest assures present value is received; and here, the Court used the Till approach concluding that using the prime rate without an upward adjustment to account for some risk was not acceptable; 

(2) Whether the debtor’s settlement of a contempt claim against an individual satisfied Bankruptcy Rule 9019 (it did).

Click here for full text of opinion:

Click here: http://www.nhb.uscourts.gov/Opinions/Judge_Deasy/2012BNH006-MoultonboroughHotel.pdf

Motion to dismiss Adversary Proceeding for Stay Relief violations denied:

(In re Lambregtse) Lambregtse v. IndyMac Mortgage Services, 2012 BNH 005 (Bankr. D.N.H. 2012)(Kornreich, sitting by designation).

Debtor filed an adversary proceeding for stay relief violations, seeking damages, and asserting its causes of action under 11 U.S.C. 362, the NH Consumer Protection Act at R.S.A. 358-C.  Defendant filed a 12(b)(6) motion to dismiss on grounds of laches, res judicata, preemption, non-applicability of statute, all of which were denied.

Click here for full text of opinion: 

Click here: http://www.nhb.uscourts.gov/Opinions/Judge_Deasy/2012BNH005-Lambregtse.pdf

Debtors' objection to IRS POC sustained and Chapter 13 plan confirmed:

In re Paradis, Ch. 13 Debtors (Bankr. D. Maine 2012)(Haines).
Success of debtors' chapter 13 plan hinged on their objection to the IRS proof of claim.  The objection was sustained and the plan confirmed. IRS argued its unsecured claim was entitled to full payment as a priority claim under 11 U.S.C. Section 507(a)(8)(A).  Court examined tolling periods, effect of offer in compromise (OIC), tax assessment dates and exceptions to discharge concluding that the taxes at issue were NOT excepted from discharged and constituted a non-priority claim.

Click here for full text of opinion:

Click here: http://www.meb.uscourts.gov/js/Judges/Paradis_11-20858_09_10_12.pdf

523(a)(6) exception to discharge satisfied by proofs relevant to workplace claims of sexual harassment, hostile work environment and discrimination at the state court level:

(In re Rines) Greenman v. Rines, (Bankr. D. Maine 2012)(Haines).

Creditor objected to Debtor's discharge or that it was not excepted under 523(a)(2),(4) or (6).  Court ruled debt debt was excepted from discharged under 523(a)(6) due to state court judgment relevant to workplace claims of harassment, discrimination and hostile work environment in New Hampshire.

Click here for full text of opinion:

Click here: http://www.meb.uscourts.gov/js/Judges/Greenman_v_Rines_12-2001_073012.pdf

Post-discharge letters sent to debtor with generic wording as to the loan and foreclosure alternatives violated the discharge where debtor surrendered the property and it was foreclosed:

(In re Collins) Collins v. Wealthbridge Mortgage Corp. and Marix Servicing,LLC, (Bankr. D. Maine 2012)(Haines).

Chapter 7 debtor surrendered property under its petition and schedules. Post-bankruptcy the loan servicer continued to send letters advising of assignment, foreclosure, property insurance, alternatives to foreclosure etc., with generic disclaimer that they were not trying to collect a debt if bankruptcy applied - eight letters were sent. Court determined that these letters violated the discharge injunction. A hearing to determine sanctions will follow.

click here for full text of opinion:

Click here: http://www.meb.uscourts.gov/js/Judges/Collins_v_Wealthbridge%20Mort%20et%20al_10-2064_7_12_12.pdf

Debtors' objection to POC overruled as no evidence presented:

In re Perron, (Bankr. D. Maine 2012)(Haines).
Chapter 13 debtors' objection to lender's proof of claim overruled.  Lender filed two amended POC's.  Debtors initial challenge to lender's standing to enforce claim was overruled as their own plan provided for payment of it and Debtors conceded some amount was due it.  Secondly, the lender's second amended POC provided sufficient evidence of its claims.  The fact that its prior two POC's had errors did not support the debtors' challenge of the second amended POC. Debtors offered no evidence to challenge the second amended POC, and it was not sufficient for debtors to argue that since the prior POC's had errors, this one must be wrong as well.

Click here for full text of opinion:

Click here: http://www.meb.uscourts.gov/js/Judges/Perron_11-20769_0612.pdf

Equitable mortgage versus absolute conveyance;
lender was on constructive notice title problems sufficient to warrant investigation and further inquiry, its mortgage was void and to entitled to BFP status.

(In re Lima) Lima v. Conlon, Jeannetti, Wban Mortgage Company, LLC, (Bankr. D.R.I. 2012)(Votolato).
Chapter 13 debtor sought to undue conveyances relevant to her home. She had hired the individual co-defendants to aid in preventing foreclosure, but they took advantage of her, skimming the equity form her home; the mortgage company had sufficient notice of these activities and its mortgage is void. The transfers were not absolute conveyances but rather equitable mortgages" where debtor retained her ownership interest.  Further, the Waban mortgage was void as it was on constructive notice of debtor's adverse claims in its (1) knowledge that one of the two individual co-defendants did not live at the mortgaged premises but possibly the debtor did, but rather the debtor did; and (2) the deed from debtor to the individual con-defendant was so deficient as to consideration as to raise questions of its bona fides, as the property was worth at least 4 times what the consideration recited.
Thus, although Waban was a bona fide purchaser, who purchased for value and in good faith, it was on constructive notice of the debtor's adverse claim to ownership of the property.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/jul/Lima.Findings%20Conclusions%20and%20Judgment.pdf

Trustee avoids debtor's transfer back to mom of mom's gratuitous gift:

(In re Hill) Ferrara, Trustee v. Socia, (Bankr. D.R.I. 2012)(Votolato).

Ch. 7 trustee's avoided debtor's transfer of interest to her mother under Section 548. Mother had transferred an interest in mom's property to debtor for no consideration; and, then where debtor had financial difficulties, debtor deeded it back to mom.  At minimum, mom had created a survivorship interest in the property that should have been declared on debtor's schedules.  Thus, trustee entitled under Section 548 to avoid the transfer and recover the value of the interest transferred under Section 550.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/jun/Hill%20Decision%20&%20Ord%20Granting%20MSJ.pdf

Transfer of sale of house proceeds from debtor parents to children found to be fraudulent; Court did not find Stern v. Marshall a bar to adjudicating the controversy:

(In re Cabrera) Ferrara, Trustee, v. Carera et als., (Bankr. D.R.I. 2012)(Votolato).

Debtors' sale of their home, then giving proceeds of the sale to their children was a fraudulent transfer per Section 544(b) and Rhode Island's fraudulent transfer law, with the proceeds to be recovered under Section 550.  Parties did not raise, and the Court was not troubled by the Stern v. Marshall issue.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/jun/Cabrera%20Decision%20&%20Ord%20Avoiding%20Transfers.pdf

Broker's opinion as to value, carries weight, as does certified appraiser when deciding whether lender's secured claim can be modified:

In re Espinal, (Bankr. D.R.I. 2012)(Votolato).

In seeking to modify the lender's claim, the court reviewed value of the property including personally viewing it himself.  Court gave short shrift to lender's argument that the lender's certified appraiser carried more weight than a broker's opinion as to value.  Court allowed modification of the secured claim.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/may/Espinal%20Decision%20&%20Order%20Modifying%20SecClaim.pdf

Bank assessed $15,000 plus attorney fees for stay relief violations; Debtor's testimony of her emotional distress and medical condition did not require expert testimony:

In re Tine (versus RBS Citizens Bank, N.A.(Bankr. D.R.I. 2012)(Votolato).

Bank assessed $15,000 plus attorney fees for stay relief violations; Debtor's testimony of her emotional distress and medical condition did not require expert testimony.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/may/Tine%20Decision%20Finding%20Stay%20Violations%20&%20Order%20Awarding%20F

Stay not imposed in serial 13 filings, barred by laches, anti-injunction act and debtor's laches:

In re Blanchard,(Bankr. D.R.I. 2012)(Votolato).

Motion to impose or enforce imposition of the automatic stay is denied; and stay is vacated retroactively to the extent applicable regarding a tax sale deed. Further, the anti-injunction act would apply.  Debtor had filed multiple Chapter 13 cases and the property and mortgage at issue was not listed in the prior case and thus none could have been aware that the stay was in effect having no actual or constructive notice of it, and any violation would be technical rather than willful.  Further, to the extent applicable, debtor slept on his rights.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/may/Blanchard%20Decision%20&%20Ord%20Denying%20M%20Enforce%20Stay.pdf

Chapter 7 debtor's Motion to reopen case denied as procedurally defective;

even if merits decided, debts at issue were not discharged as under 523(a)(7) as government fines:

In re Manzi, (Bankr. D.R.I. 2012)(Votolato).

Pre-petition, debtor was convicted and ordered to pay restitution. Related to that were fines ordered paid to a board. This would not be discharged under 523(a)(7). Thus, it would be a waste of time to reopen the case to add these debts.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/apr/Manzi%20Order%20Denying%20M%20to%20Reopen.pdf

Court does not appreciate windy complaints:

(In re Ahlborg) Tiverton, LLC v. Ahlborg, (Bankr. D.R.I. 2012)(Votolato).

In ruling on motions ti dismiss, granting in part and denying in part, counts relevant to a complaint challenging discharge, Court clearly evinced that it does not appreciate redundant or overly lengthy pleadings which cause a waste of time in review.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/apr/Ahlborg%20Starwood%20Decision%20Granting%20Denying%20M%20Dismiss.pdf

Plaintiff's counsel in discharge action sanctioned $7500 to deter delay and promote expeditious litigation:

(In re Cortellesso) Benson v. Cortellesso, (Bankr. D.R.I. 2012)(Votolato).

Debtors requested sanctions upon dismissal of multiple adversary proceedings challenging discharge. Seven cases raises 727 were dismissed. The first phase dragged out longer than needed, the court prodding plaintiff's counsel to get to the point.The second phase was to try their 523 claims, but all decided at some point not go forward on them.  Discovery plans were not complied with on the plaintiffs' end. Plaintiffs could not afford to go forward on the 523 claims. Sanctions were appropriate to deter promulgation of unreasonable delay and to foster the expeditious management of litigation. Thus, plaintiff's counsel was sanctioned $7500.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/mar/Cortellesso%20Decision%20and%20Ord%20Dismissing%20523%20Complaints%20and

State law causes of action against non-debtor defendants dismissed by application of Stern v. Marshall:

In re West M2M Multihul, LLC v. West et als, (Bankr. D.R.I. 2012)(Votolato).

Garden variety state law causes of action against the non-debtor defendants dismissed; concern of jurisdiction raised by Stern v. Marshall.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/jan/West%20M2M%20Multihull%20Decision%20&%20Ord%20Dismissing%20Complaint.pdf

Mere recitation of cause of action will not defeat dismissal:

(In re Debaene) Adoni Outreach Ministry v. Debaene, (Bankr. D.R.I. 2012)(Votolato).

Mere recitation of allegations will not defeat summary judgment.

Click here for full text of opinion:

Click here: http://www.rib.uscourts.gov/D/Current/apr/DeBAENE%20Ord%20Granting%20MSJ.pdf

Around the Circuits regarding recent bankruptcy decisions.

First Circuit:

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

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

“What happened in this bankruptcy case is probably every homeowner's worst nightmare." 

HELD: First Circuit vacated the BAP's judgment and remanded to that tribunal with directions that it, in turn, remand the case to the bankruptcy court for further proceedings consistent with this opinion. 

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

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

MATOS [Debtor], Appellant, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-074, (BAP 1^st Circuit Sept. 26, 2012) (Before Judges Boroff, Deasy, and Bailey) (Opinion by Deasy).   

HELD: Bankruptcy Appellate Panel reversed the bankruptcy court's determination that the income tax refund at issue was not property of the estate. BAP found that the income tax refund was property of the chapter 13 bankruptcy estate and thus could be exempted on Schedule C.  As such, the Chapter 13 trustee's objection to the debtor's exemption in the refund is overruled.  For a similar ruling, see SANTIAGO, MORALES, Appellants, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-075 (BAP 1^st Circuit   September 26, 2012) (Before Boroff, Deasy, and Bailey, Opinion by Deasy). 

  
Date of valuing collateral is "flexible"; 
post-petition interest paid to over-secured creditor at default rate and compounded:

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant / Cross-Appellee, v. CITY OF BOSTON, Appellee, and SW BOSTON HOTEL VENTURE, LLC, et al., Appellees / Cross-Appellants [Debtors],  BAP NO. MB 11-079, (BAP 1^st Circuit October 1, 2012) (Before Haines, Deasy, and Tester, Opinion by Deasy).   

HELD: BAP AFFIRMS the Default Rate Calculation, REVERSES the 506(b) Order and the Prudential Claim Order, and REMANDS. 

SUMMARY:  The BAP held that they will follow the "flexible" approach rather than a fixed date for valuation of collateral for purposes of Section 506(b), and in so doing the creditor's debt was determined to be over-secured and the creditor entitled to be paid then post-petition interest, said interest paid at the contract's default rate and compounded. 

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

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant / Cross-Appellee, v. CITY OF BOSTON, Appellee, and SW BOSTON HOTEL VENTURE, LLC, et al., Appellees / Cross-Appellants [Debtors],  BAP NO. MB 11-087, BAP 1^st Circuit October 1, 2012) (Before Haines, Deasy, and Tester, Per Curiam).  

Prudential Insurance Company of America appealed from the bankruptcy court’s decision and accompanying order confirming the Debtors’ Modified First Amended Joint Plan of Reorganization and the order overruling Prudential’s objection to confirmation of the Plan. Because the  BAP’s above opinion and reversal altered the landscape dramatically, its practical result is a significant increase in the amount of Prudential’s claim, which, in turn, impacts the evaluation of the Plan’s terms under §1129. Thus, the BAP vacated the Confirmation Orders, so as to afford the Debtors an opportunity to amend the Plan’s terms to account for the increased amount of Prudential’s claim (per the above opinion) and the resulting pay out to Prudential and/or for the bankruptcy court to fashion alternative forms of relief for Prudential that would not unravel the reorganization. 

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

GONSALVES, Plaintiff-Appellant, v. BELICE [Debtor], Defendant, Appellee, BAP NO. MB 11-048, (BAP 1^st Cir. October 15, 2012) (Before Lamoutte, Haines, and Deasy, Opinion by Haines) [No brief filed for Appellee, Appellant Pro Se].  

Gonsalves, a pro se creditor, appealed: (1) the order granting the motion of the debtor to dismiss Gonsalves’ adversary complaint; and (2) the order denying Gonsalves’ motion for relief from judgment.  As the BAP concluded that the dismissal was not only beyond the scope of their prior remand but was also legal error, they VACATED the orders and REMANDED the matter for further proceedings consistent with this opinion.  In a prior opinion, the BAP found that the debtor's notice to the creditor was so defective as to defeat notice of the bankruptcy case or discharge bar date, allowing then the creditor to go forward on one of his two counts challenging the dischargability of his debt, with the Section 727 count being time barred but the §523(a) count not. Thus, the bankruptcy court's dismissal of the §523(a) count exceeded the scope of the prior remand i.e. BAP had concluded in its prior opinion that the creditor's complaint presented a plausible case for relief under §523(a)(3). Therefore, it was error for the bankruptcy court  to dismiss this claim on the grounds that he failed to state a claim upon which relief can be granted.  On remand, debtor again sought dismissal under Rule 12(b)(6), this time based on his argument that creditor had failed to file the §523(a)(3) count within one year of his discharge, despite having received notice a month prior to that anniversary. Debtor erroneously contended that the one year limitation set by §727(e) for discharge revocation actions applied to the creditor's §523(a)(3) claim. Creditor argued that because the BAP's remand confined the bankruptcy court to consideration of the merits of his §523(a)(3) count, it was error to expand its scope to include a request for dismissal based on timeliness. He contends that it was also error to dismiss his complaint for failure to file a response to the dismissal motion when he had, in fact, filed an objection. He lastly reiterates that his complaint was not time-barred. The BAP agreed. 

Construction debt WAS discharged as fraudulent intent not found:

BELLAS PAVERS, LLC, Plaintiff-Appellant, v. STEWART [Debtor], Defendant-Appellee, BAP NO. MB 12-017, (Before Lamoutte, Kornreich, and Cabán, Opinion by Cabán) (BAP 1^st Circuit  October 18, 2012). 

This case arises out of an adversary proceeding brought by Bellas Pavers, LLC seeking to except from discharge a debt owed by Stewart for masonry services. The bankruptcy court conducted a trial, and at the close of Bellas’ case, Stewart moved for a judgment on partial findings pursuant to Fed. R. Civ. P. 52(c), which the Court granted and entered judgment in favor of Stewart. Thereafter, Bellas filed a motion pursuant to Fed. R. Civ. P. 59(a) requesting a new trial, or in the alternative, that the bankruptcy court reopen the original trial, enter new findings of facts and conclusions of law, find in Bellas’ favor on all counts, and enter a judgment of non-dischargeability. The bankruptcy court denied the motion for a new trial, and Bellas appealed. Controversy centers on the construction of a stone patio and retaining wall where the debtor failed to pay a sub-contractor even though the debtor was paid for the job. The bankruptcy court conducted a trial. After plaintiff put on two witnesses, Stewart moved for a judgment on partial findings pursuant to Rule 52(c), asserting three grounds: (1) lack of personal liability for Premier’s actions (the agreement was between Bellas and Premier, not Stewart); (2) lack of evidence that Stewart had fraudulent intent when he entered into the agreement with Bellas on Premier’s behalf; and (3) lack of evidence that Bellas had reasonably relied on Stewart’s representations. As to the question of fraudulent intent, the bankruptcy court stated as follows: It’s perfectly consistent [with] the evidence that Mr. Stewart did, in fact, intend when he entered into the contract with Bellas on behalf of Premier to have Bella[s] paid. I have nothing in my record that indicates that that was a lie. . . I don’t know what happened that Premier/Stewart didn’t pay Bellas Pavers. Maybe they just ran out of money. I don’t know what they did with the money, but that doesn’t prove that it should be a debt [sic] will be – which would be nondischargeable in bankruptcy.”  Given these facts, the bankruptcy court granted Stewart’s motion under Rule 52(c), and entered judgment in his favor. Thus, based upon the record, we conclude that the bankruptcy court did not err by not inferring fraudulent intent from the totality of the circumstances. 

HELD: AFFIRMED. 

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

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Third Circuit:

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

In re: Michael,  (3d Cir. Pa. October 26, 2012). 

Appeal decided that at the time of conversion from Ch. 7 to Ch. 13, a Chapter 13 trustee must return to the debtor the funds the Ch. 13 trustee is holding regarding funds acquired post-petition by the debtor for eventual distribution to creditors under a confirmed Chapter 13 plan.  The Bankruptcy Court held that the funds were to be returned to the debtor at the time of conversion, the District Court affirmed the Bankruptcy Court's holding and the Court of Appeals affirmed the District Court's decision.

Debtor waived right to appeal sentence:

United States of America v. Vincent Scirotto, (3d Cir. Pa. October 2, 2012).

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

  

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Fourth Circuit

  

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

Callahan v. Osteen (In re Osteen), No. 3:12-CV-00023 (W.D. Va. Oct. 19, 2012).

District Court affirmed the Bankruptcy Court’s decision dismissing a Chapter 7 Trustee’s avoidance action brought under Section 548.  Chapter 7 Trustee sought to avoid a pre-petition transfer where the Debtors granted to the Lender a  a confirmatory deed in trust on their residence, due to the lender having lost the original.   The documents were recorded on July 2009.  In October 2009, the Debtors filed Chapter 13 and then later converted their case to Chapter 7. Chapter 7 trustee tried unsuccessfully to avoid the transfer.  While the parties agreed that the Debtors were insolvent at the time of the transfer, the Debtors and Lender disputed the Trustee's contentions that the transfer was not an exchange of reasonably equivalent value.  Bankruptcy Court held that consideration may consist of securing antecedent debt and that the exchange of value need not be contemporaneous.  Bankruptcy Court focused on whether the value exchanged by collateralizing past debt constituted ‘reasonably equivalent value’ by viewing the totality of the circumstances.  Court held that while collateralization of past debt is not automatically deemed reasonably equivalent value, in this instance the Debtors’ and Lender’s exchange was for reasonably equivalent value.  

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

Stephens, Boatwright, Cooper & Coleman, PC, v. Beskin, No. 3:12-CV-00020, 2012 (W.D. Va. Oct. 12, 2012).

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

Default judgment was appropriate discovery sanction:

Zhang v. Greenfeld (In re Zhang), No. 12-CV-1287 (D. Md. Oct. 19, 2012). 

District Court affirmed Bankruptcy Court’s order denying defendant's motion to vacate an order entering default judgment as a discovery sanctions. Defendants repeatedly failed to provide discovery to the Ch. 7 trustee.  In affirming, the District Court reviewed whether defendants acted in bad faith, the amount of prejudice the defendants' noncompliance caused the trustee as the discovery sought was material, deterrence, and whether less drastic sanctions were appropriate.  District Court found that based on the record before it, the Bankruptcy Court did not abuse its discretion in awarding the sanctions at issue, particularly since the withheld discovery prejudiced the Chapter 7 trustee. Finally, the defendants did not meet the legal standards for vacature of the order at issue.

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

Coler v. Draper, No. 12-CV-2020, (D. Md. Oct. 23, 2012).

District Court affirmed Bankruptcy Court's denial of stay pending appeal to the debtor.  As background, debtor filed Chapter 13 and a creditor moved to dismiss on bad faith grounds, asserting creditor's was the only debt at issue that debtor was in arrears and that the equity in debtor's realty would have satisfied the debt. The Bankruptcy Court dismissed the case as filed in bad faith, which debtor appealed.  Debtor moved for s stay pending appeal, which the Bankruptcy Court denied.  District Court reviewed debtor's request for a stay pending appeal under the factors for a preliminary injunction, as set forth in Winter v. National Res. Def. Council, Inc., 555 U.S. 7 (2008) i.e. debtor is likely to succeed on the merits of the underlying appeal, (2) debtor is likely to suffer irreparable harm in the absence of imposing a stay pending appeal, (3) the balance of equities tips in debtor's favor, and (4) imposition of  the stay pending appeal would serve the public interest.  In considering the merits of the underlying appeal, District Court found that the debtor's  Chapter 13 filing was done solely to defeat the creditor's judgment at issue, which supports the Bankruptcy Court's findings of bad faith, and thus imposition of a stay pending appeal was not deserved because the debtor could not show that he was likely to succeed on the merits of the appeal.  Further, debtor did not show irreparable harm since the debtor had not changed his lifestyle before or after the bankruptcy filing, so the dismissal of the chapter 13 case was not "irreparable harm".

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

Lakefront Investors LLC, et al. v. Clarkson, et al., No. 12-CV-0326, (D. Md. Oct. 26, 2012).

District Court reversed the Bankruptcy Court’s decision to dismiss two Chapter 11 cases rather than converting them, giving deference to Debtors' wishes to dismiss rather than convert, even thought eh Ch. 11 trustee appointed in the cases favored conversions. Bankruptcy Court gave deference to Debtors favoring dismissal, and that the Debtors' lenders were essentially the only creditors who would benefit from conversion, that the unsecureds would probably not receive a recovery and Debtors' belief that the pending adversary proceedings would not garner much money if successful.  Upon appeal by the lenders, District Court held that the Bankruptcy Court erred (as a matter of law) by not converting, finding that the focus should ONLY have been the "best interests of creditors and the estate", rather than deferring to Debtors' wishes. Further, Bankruptcy Court   The Bankruptcy Court should have also examined lender's rights in state court versus bankruptcy upon conversion.
  

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Ninth Circuit:

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

In re Cummings, (9th Cir. B.A.P.). 

BAP upheld the Bankruptcy Court’s decision denying debtors' discharge under Section 727(a)(4) as debtors knowingly and fraudulently made multiple false oaths relating to the source and amount of income. 

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

In re Mathon Fund, LLC, (9th Cir. B.A.P.).

BAP affirmed the Bankruptcy Court’s decision denying the motion for retroactive relief from the automatic stay under 11 U.S.C. Section 362(d)(1). Appellants failed to move for relief, waiting until five years after litigation began.

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

In re Diepholz, (9th Cir. B.A.P.).

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

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

In re Bishay, (9th Cir. B.A.P.).

BAP affirmed Bankruptcy Court’s decision that appellant waived his right to dispute equitable subordination applied when appellant did not raise the issue prior to appeal.  Even so,  BAP found that the Bankruptcy Court correctly determined that based on the evidence before it, a subordination agreement did exist anyway.

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

In re Oliver, (9th Cir. B.A.P.).

BAP affirmed Bankruptcy Court’s dismissal of Chapter 13 case on the basis that the Ch. 13 debtor failed to attend the first Section 341(a) meeting without reasonable explanation.

Debtor's objection to POC overruled:

In re Green, 2012 (9th Cir. B.A.P.).

BAP affirmed the Bankruptcy Court’s denial of debtor’s objection to a proof of claim, debtor claiming that the creditor provided insufficient evidence regarding perfection of the creditor's asserted lien as the lower court properly examined and applied the correct UCC provision.

Recent Cases from the First Circuit and BAP re Bankruptcy.

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

Remanded to determine damages; 

First Circuit focuses on factual causation and legal causation, 

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

Click here: USCA1 Opinion

Sharfarz, Appellant, v. Goguen [Debtor], Appellee, 691 F.3d 62 (1st Cir. 2012) (Before Justices Boudin, Souter, Thompson, Opinion by Thompson). “What happened in this bankruptcy case is probably every homeowner's worst nightmare." HELD: We vacate the BAP's judgment and remand to that tribunal with directions that it, in turn, remand the case to the bankruptcy court for further proceedings consistent with this opinion. BACKGROUND: Sharfarz hired Goguen as a contractor for a home addition. The contract specified different construction phases, required Goguen to obtain the necessary town permits, required Sharfarz to make progress payments to Goguen totaling roughly $171,000 and set a completion. Sharfarz paid Goguen $25,693 as the first installment payment, and stressed why sticking to the schedule was so important to him. Later Goguen emailed Sharfarz that he had " filed" a building-permit application with the town and was " in wait mode”, which was not true and Goguen did his best to keep Sharfarz from finding that out. Unfortunately, the foundation would eventually crack— just as Sharfarz feared it would. Sharfarz continued making progress payments, even though Goguen made little progress. Sharfarz had paid Goguen the full contract price, and then some. Yet Goguen threatened not to finish the project unless he got more money. Sharfarz said no. Goguen walked. And Sharfarz had to pay other contractors $88,000 to finish the job. 

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

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

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

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

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

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

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

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

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

Click here: USBAP1 Opinion 11-074P

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

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

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

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

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

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

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

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

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

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

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

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

Valuation date of collateral is flexible:

Click here: USBAP1 Opinion 11-079P

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant / Cross-Appellee, v. CITY OF BOSTON, Appellee, and SW BOSTON HOTEL VENTURE, LLC, et al., Appellees / Cross-Appellants [Debtors],  BAP NOS. MB 11-079, (BAP 1^st Circuit October 1, 2012)(Before Haines, Deasy, and Tester, Opinion by Deasy).   HELD: We AFFIRM the Default Rate Calculation, REVERSE the 506(b) Order and the Prudential Claim Order, and REMAND.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here: USBAP1 Opinion 11-048P  

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

                                                  

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

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

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

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

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

FURTHER DISCUSSION: Gonsalves argues that because our remand confined the bankruptcy court to consideration of the merits of his §523(a)(3) count, it was error to expand its scope to include a request for dismissal based on timeliness. He contends that it was also error to dismiss his complaint for failure to file a response to the dismissal motion when he had, in fact, filed an objection. He lastly reiterates that his complaint was not time-barred. We agree. 

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

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

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

Click here: USBAP1 Opinion 12-017U

BELLAS PAVERS, LLC, Plaintiff-Appellant, v. STEWART [Debtor], Defendant-Appellee, BAP NO. MB 12-017; (Before Lamoutte, Kornreich, and Cabán, Opinion by Cabán)(BAP 1^st Circuit  October 18, 2012).                                                                               PROCEDURAL: This case arises out of an adversary proceeding brought by Bellas Pavers, LLC seeking to except from discharge a debt owed by Stewart for masonry services. The bankruptcy court conducted a trial, and at the close of Bellas’ case, Stewart moved for a judgment on partial findings pursuant to Fed. R. Civ. P. 52(c), which the Court granted and entered judgment in favor of Stewart. Thereafter, Bellas filed a motion pursuant to Fed. R. Civ. P. 59(a) requesting a new trial, or in the alternative, that the bankruptcy court reopen the original trial, enter new findings of facts and conclusions of law, find in Bellas’ favor on all counts, and enter a judgment of non-dischargeability. The bankruptcy court denied the motion for a new trial, and Bellas appealed.  HELD: We AFFIRM.                                                                                                    
BACKGROUND:   Controversy centers on the construction of a stone patio and retaining wall where the debtor failed to pay a sub-contractor even though the debtor was paid for the job. Bellas brought an adversary proceeding against Stewart claiming that the outstanding debt to Bellas should not be discharged because it was based on fraud. Specifically, Bellas claimed that Stewart, when hiring Bellas as a masonry subcontractor, never intended to pay Bellas. Although Bellas did not identify any specific Bankruptcy Code sections in its complaint, its allegations of fraud suggested a claim under § 523(a)(2)(A). The bankruptcy court conducted a trial on March 23, 2012. After plaintiff put on two witnesses, Stewart moved for a judgment on partial findings pursuant to Rule 52(c), asserting three grounds: (1) lack of personal liability for Premier’s actions (the agreement was between Bellas and Premier, not Stewart); (2) lack of evidence that Stewart had fraudulent intent when he entered into the agreement with Bellas on Premier’s behalf; and (3) lack of evidence that Bellas had reasonably relied on Stewart’s representations. As to the question of fraudulent intent, the bankruptcy court stated as follows: It’s perfectly consistent [with] the evidence that Mr. Stewart did, in fact, intend when he entered into the contract with Bellas on behalf of Premier to have Bella[s] paid. I have nothing in my record that indicates that that was a lie. . . I don’t know what happened that Premier/Stewart didn’t pay Bellas Pavers. Maybe they just ran out of money. I don’t know what they did with the money, but that doesn’t prove that it should be a debt [sic] will be – which would be nondischargeable in bankruptcy.”  Given these facts, the bankruptcy court granted Stewart’s motion under Rule 52(c), and entered judgment in his favor. Thus, based upon the record, we conclude that the bankruptcy court did not err by not inferring fraudulent intent from the totality of the circumstances.                                                                                                                  

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

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

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

The Motion for Damages and Costs:  Stewart has filed a separate motion under Bankruptcy Rule 8020 seeking damages, including attorneys’ fees and costs, incurred in defending this appeal.  Bellas objects to the motion. Bankruptcy Rule 8020 provides: If a . . . bankruptcy appellate panel determines that an appeal . . . is frivolous, it may, after a separately filed motion . . . and reasonable opportunity to respond, award just damages and single or double costs to the appellee. Imposing sanctions under Bankruptcy Rule 8020 is a “two-step process.” We must determine: (1) whether the appeal is frivolous; and (2) whether the moving party has fulfilled the procedural requirements of Bankruptcy Rule 8020. Bankruptcy Rule 8020 requires that a party must request sanctions in a separately filed motion and that the person or party targeted by the motion or notice must be given notice and an opportunity to respond. Stewart filed a separate motion, served it on Bellas, and provided it with an opportunity to respond, which it did. Thus, the procedural requirements have been met. While there is no formula for determining whether an appeal is frivolous, courts generally consider several factors, including: the appellant’s bad faith, whether the argument presented on appeal is meritless in toto, and whether only part of the argument is frivolous. A court may consider whether the appellant’s argument addresses the issues on appeal, fails to cite any authority, cites inapplicable authority, makes unsubstantiated factual assertions, asserts bare legal conclusions, or misrepresents the record. However, “[Bankruptcy] Rule 8020 is far from a strict liability model. More than just a losing argument is necessary to support a conclusion that an appeal is frivolous.  An appeal is frivolous if the result is obvious or the arguments supporting the appeal are wholly without merit.  CONCLUSION: For the reasons set forth above, we conclude that the bankruptcy court did not abuse its discretion in denying the motion for a new trial, and that the bankruptcy court’s findings with respect to § 523(a)(2)(A) were not clearly erroneous. Therefore, we AFFIRM both the order denying the motion for a new trial and the judgment in favor of Stewart. We also DENY Stewart’s motion for sanctions.