Bankruptcy Cases of Interest in September 2013 from The Consumer Bankruptcy Abstracts & Research, and The National Consumer Bankruptcy Rights Center

Cases in Review September, 2013

“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).

Authority of the court—Imposition of sanctions—On creditor’s attorney - 

Court can sanction creditor's attorney by requiring that all dischargee complaints comply with the rules: 

The Fifth Circuit Court of Appeals held that the bankruptcy court did not abuse its discretion in requiring a creditor’s attorney (formerly employed by Weinstein & Riley, P.S.) to (1) comply with Fed. R. Civ. Proc. 9(b) in filing nondischargeability complaints under Code § 523(a)(2)(A) and (2) file a copy of the bankruptcy court’s order in every adversary proceeding commenced by the attorney in the Southern District of Texas over the next year. The bankruptcy court found that the attorney had a practice of filing generic credit card nondischargeability complaints that did not comply with Rule 9(b). The Court of Appeals reasoned that nothing in the bankruptcy court's limited order prevented the attorney from practicing law or inconvenienced the attorney to such an extent that it in effect prevented him from the practice of law. The Court of Appeals therefore agreed with the district court's analysis that the bankruptcy court's order did not rise to the level of a suspension and was not quasicriminal in nature. In re Monteagudo, --- Fed. Appx. ----, 2013 WL 3753609 (5th Cir. July 18, 2013).

Chapter 7—Stripping unsecured lien - 

11th Circuit Allows lien stripping second mortgage in Chapter 7 (pub. decision):

The Eleventh Circuit Court of Appeals released an order in In re McNeal that contains two significant decisions. First, the court granted the debtor’s motion to publish its opinion, currently found at In re McNeal, 477 Fed. Appx. 562 (11th Cir. May 11, 2012), which held that, under existing circuit precedent, a Chapter 7 debtor may strip a wholly-unsecured lien. This will result in a fully-precedential opinion. Second, the court stated that, since the stay had been lifted in the appellee mortgage creditors’ bankruptcy cases (which are part of the Residential Capital bankruptcy), the appeal in the pending case was no longer stayed. This will allow the court to consider the creditors’ petition for rehearing en banc. The court said that no ruling would be made on that petition until at least 30 days after publication of the panel decision in the case. In re McNeal, Case No. 11-11352 (11th Cir. Aug. 2, 2013). 

Chapter 13—Confirmation of plan—Calculation of projected disposable income - 

Deducting Pension payments from PDI is permitted: 

Taking the intermediate position on the issue, the bankruptcy court held  that, in calculating projected disposable income, a Chapter 13 debtor is permitted to deduct voluntary contributions to an ERISA-qualified retirement plan that the debtor is making on the petition date. While the contributions are subject to a good-faith analysis, here the 47-year-old debtor’s commencing a $541.67 monthly contribution less than three months prior to filing her joint bankruptcy petition was not in bad faith, where the court found credible the debtor’s explanation that she was worried that Social Security would not be solvent when she reached retirement age. In re Jensen, --- B.R. ----, 2013 WL 3877818 (Bankr. D. Utah July 26, 2013).

Chapter 13—Confirmation of plan—Good faith -  

Plan can pay 100% to unsecured over 60 months even if Debtor you could it in less months is permitted:

Two more courts held that, where a Chapter 13 plan pays unsecured creditors in full, it is not bad faith under Code § 1325(a)(3) for the plan to do so over the debtor’s full applicable commitment period, even if the creditors could be paid more quickly if the debtor paid his or her full projected disposable income each month. In re Braswell, 2013 WL 3270752 (Bankr. D. Or. June 27, 2013); In re McGehan, --- B.R. ----, 2013 WL 4069524 (Bankr. D. Colo. July 19, 2013).

Dischargeability—Court-ordered restitution - 

Restitution was discharged where paid directly to victim: 

Court-ordered restitution of $919,356 that the Chapter 7 debtors, who pled guilty to embezzlement from a vulnerable adult, were directed to pay did not fall within the discharge exception in Code § 523(a)(7) for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit that was not compensation for actual pecuniary loss. Although the debtors' restitution may have been initially payable to the probation department, the Michigan restitution statute required that it then be paid to the victim or her representative or estate, so that the ultimate destination of the restitution was not a governmental unit. Moreover, the amount of the restitution was the amount of damages suffered by the victim, so that the restitution was compensation for actual pecuniary loss. In re Rayes, --- B.R. ----, 2013 WL 3784159 (Bankr. E.D. Mich. July 16, 2013).

Dischargeability—Student loan debts - 

Hardship proven due to health reasons:

 Debtors established undue hardship under Code § 523(a)(8) in two recent cases, although both involved debtors with serious medical conditions. In In re Myhre, 2013 WL 3872509 (Bankr. W.D. Wis. July 25, 2013), the court discharged the student loan debt of a quadriplegic Chapter 7 debtor who was nonetheless able to work full-time and earn between $29,000 and $35,000 per year.  And in In re O'Donohoe, 2013 WL 2905275 (Bankr. S.D. Tex. June 13, 2013) the court discharged the student loan debt of a Chapter 7 debtor who, despite having earned in excess of $150,000 per year for each of 2007, 2008 and 2009, had not worked since then, due to his multiple medical conditions (cancer, morbid obesity, severe depression, bipolar disorder, adult ADHD, obsessive compulsive disorder, high blood pressure, and sleep apnea) and the mental slowness that was a side effect of the medications required to treat these conditions.

Judicial estoppel -

Re-open Ch. 7 case allowed due to mistake or inadvertence, no presumption of deceit:

 Believing that the terms “mistake” and “inadvertence” should be given their natural meanings in the context of the application of judicial estoppel, the Ninth Circuit Court of Appeals acknowledged that its approach was less stringent than that of several other circuits. Where, as here, the debtor reopened her bankruptcy proceedings, corrected her initial error, and allowed the bankruptcy court to re-process the bankruptcy case with the full and correct information, a presumption of deceit no longer was appropriate. Rather, the debtor should be allowed to establish that the cause of action on which she now sued was omitted from her prior bankruptcy schedules through mistake or inadvertence, rather than intention. Ah Quin v. County of Kauai Dept. of Transp., --- F.3d ----, 2013 WL 3814916 (9th Cir. July 24, 2013). 

Means test—Expenses - Don't list Tobacco: 

Taking a position that was nothing if not dogmatic, the bankruptcy court declared that “in the Eastern Division of the Northern District of Alabama, expenses for tobacco may never be taken as a deduction on Schedule J,” and this “will be a per se rule in this Court until the Eleventh Circuit or Supreme Court rule otherwise.” The court said that it had repeatedly sustained the Chapter 13 trustee's objections to deductions claimed for excessive phone, Internet and cable fees, pest control services, security monitoring, pet expenses, non-mandatory retirement payments, and vehicles for non-debtor family members. It was difficult to imagine, the court continued, that counsel believed tobacco expenses would be approved by the court or would not draw an objection from the trustee. In re Vest, 2013 WL 3781508 (Bankr. N.D. Ala. July 18, 2013).

Proof of claim—Secured claim—Post-petition charges—Effect of Rule 3002.1: 

Prima Facie Validity does not apply to Post-petition Charges or POC Supplements :

The Bankruptcy Code is not clear as to the burden of proof with respect to the court's determination under Bankruptcy Rule 3002.1(h) of whether a debtor has cured a prepetition default and paid all required postpetition amounts. Rule 3002.1 does provide that Rule 3001(f), which otherwise grants a presumption of prima facie validity to a proof of claim, does not apply to supplements to the claim, including postpetition fees, expenses, and charges. The court inferred from the absence of a presumption of prima facie validity that the claimant bore the burden of proof under Bankruptcy Rule 3002.1(h). In re Rodriguez, 2013 WL 3430872 (Bankr. S.D. Tex. July 8, 2013).

Use of appearance attorneys - Not allowed due to lack of accountabililty:

Concluding that the use of appearance attorneys posed such significant problems to the proper and effective administration of consumer debtor cases that their use must be barred, Chief Bankruptcy Judge Jeff Bohm ruled that appearance attorneys would no longer be permitted to appear in cases over which he presided. Explaining that one of the largest problems with appearance attorneys was the potential lack of accountability, the court said that appearance attorneys were rarely listed as an attorney of record or co-counsel in a case, and this could raise questions as to the legitimacy of their representation of debtors and their authority to speak for, or make admissions on behalf of, the debtor. Moreover, appearance attorneys helped promote lazy and poor lawyering, as there was evidence that some practitioners never met with their clients. Ultimately, use of appearance attorneys constituted improper representation for an attorney's client. The client did not hire the appearance attorney and, almost always, the client had little or no say as to whether the attorney they did hire would represent them at any given proceeding. Often, debtors were given no notice that their own attorney would not personally represent them at their meeting of creditors or at any hearing, and this was what happened in the case at hand. The court ruled that both Code § 105(a) and Bankruptcy Rule 9029(b) permitted the court to prohibit the further use of appearance attorneys. In re Bradley, ---B.R. ----, 2013 WL 3753559 (Bankr. S.D. Tex.July 16, 2013).

Recent Bankruptcy Cases from Around the Circuits Posted by NACBA.

Cases in Review

June, 2013

“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).

Chapter 13—Confirmation of plan—Treatment of unsecured claims—Unfair

discrimination—Consumer codebtor claim:
Effectively adopting the bankruptcy court’s position that consumer codebtor claims for debts incurred for the debtor’s benefit are excluded from unfair discrimination analysis under Code § 1322(b)(1), the Bankruptcy Appellate Panel embraced a three-part test that requires an examination of (1) whether the claim truly is a codebtor consumer claim; (2) whether the codebtor undertook the underlying liability for the debtor's benefit or vice-versa; and (3) whether the plan satisfies the other requirements for plan confirmation, particularly the good faith requirement under § 1325(a)(3). Here, the bankruptcy court properly determined that the Chapter 13 debtors’ classification scheme was proposed in good faith and satisfied plan confirmation requirements, where the debtors’ plan paid an unsecured consumer codebtor claim of $25,462, which was incurred for the debtor husband’s benefit and guaranteed by the debtor wife’s mother, in full, while paying other unsecured creditors an estimated dividend of 4.51%. In re Martinez Rivera, --- B.R. ----, 2013 WL 1406209 (B.A.P. 1st Cir. April 5, 2013).

Chapter 13—Stripping unsecured lien—Necessity of discharge:
In the first Court of Appeals decision on the issue, the Fourth Circuit Court of Appeals, in a 2-1 panel decision, held that a Chapter 13 debtor ineligible for a discharge may strip a whollyunsecured lien. A completely valueless lien is classified as an unsecured claim under Code § 506(a), the court said, and Code § 1322 expressly permits modification of the rights of unsecured creditors. BAPCPA did not amend sections 506 or 1322(b), so the analysis permitting lien-stripping in “Chapter 20” cases is no different than that in any other Chapter 13 case. A requirement that a claim secured by a worthless lien be considered an “allowed secured claim” for the purpose of Code § 1325(a)(5) would be inconsistent with Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed. 2d 228 (1993), which valued a claim under section 506 before analyzing whether section 1322 barred its modification. While the court did not take lightly the Chapter 13 trustee's assertion that permitting lien-stripping in Chapter 20 cases created an end run around the bar to such relief in Chapter 7 cases enacted in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), the trustee's premise ignored the equally reasonable view that Congress intended to leave intact the normal Chapter 13 lien stripping regime where a debtor could otherwise satisfy the requirements for filing a Chapter 20 case. In re Davis, --- F.3d ----, 2013 WL 1926407 (4th Cir. May 10, 2013).

Dischargeability of debt—For defalcation by fiduciary under Code § 523(a)(4)—Scienter requirement: Observing that “[t]he lower courts have long disagreed about whether ‘defalcation’ includes a scienter requirement and, if so, what kind of scienter it requires,” the Supreme Court, in a unanimous decision by Justice Breyer, held that “defalcation,” for the purpose of the discharge exception found at Code § 523(a)(4), includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior. Noting that, in Neal v. Clark, 95 U.S. 704, 24 L.Ed. 586 (1878), the Court had construed “fraud” as meaning “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, … and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality,” the Court concluded that the statutory term “defalcation” should be treated similarly. Bullock v. BankChampaign, N.A., 2013 WL 1942393 (U.S. May 13, 2013).

Dischargeability of debt—Student loan debt: In an important win for debtors, the

Seventh Circuit Court of Appeals rejected the district court’s conclusion that the

debtor’s failure to apply for the William D. Ford Income–Based Repayment Plan

showed a lack of good faith under the Brunner test. Code § 523(a)(8) requires proof of

“undue hardship,” the court said, and it was important not to allow judicial glosses to  supersede the statute itself. Here, the evidence showed that the debtor could not pay

the debt now or in the foreseeable future. She was living with her 75-year-old mother

in a rural community where few jobs were available; mother and daughter between

them had only a few hundred dollars (from governmental programs) every month.

She was too poor to move in search of better employment prospects elsewhere, and

her car, which was more than a decade old, needed repairs. She lacked Internet access,

which coupled with the lack of transportation hampered a search for work. The

debtor was 53 years old and had not held a job since 1986, when she left the work

force to raise a family. She did not earn more than $12,000 a year in her working

career (between 1978 and 1986). Krieger v. Educational Credit Management Corp., --- F.3d ----, 2013 WL 1442305 (7th Cir. April 10, 2013).

Dischargeability of debt—Student loan debt: Reversing the bankruptcy court, the BAP held that the 64-year-old unemployed Chapter 7 debtor satisfied the good faith prong of the Brunner test, and that discharge of the debtor’s $95,000 student loan debt on the ground of undue hardship was warranted, although the debtor had made no voluntary payments on the loans and she had not applied for the Income-Based Repayment Plan, where the debtor’s only income was Social Security of $774 per month, which was less than her expenses; the debtor suffered from several chronic medical conditions, including a thyroid condition, diabetes, macular degeneration, cataracts, high cholesterol, and depression; the debtor made good faith efforts to obtain employment, maximize income, and minimize expenses; and the debtor did not come to bankruptcy court seeking discharge until many years after the loans were in repayment status. An important concurring opinion argues that the Brunner test “is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor's circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.” In re Roth, --- B.R. ----, 2013 WL 1623839 (B.A.P. 9th Cir. April 16, 2013).

Proof of claim—Secured claim—Existence of security interest: Two courts disagreed over whether the language in Best Buy’s credit application and cardholder agreement, both of which grant Best Buy a security interest in “the goods purchased” with the customer’s Best Buy credit card, is sufficient under UCC § 9-108 to create an enforceable security interest in goods purchased with the card. Compare In re Cunningham, --- B.R. ----, 2013 WL 1429683 (Bankr. D. Kan. April 8, 2013) (security interest does not exist) with In re Murphy, 2013 WL 1856337 (Bankr. D. Kan. May 2, 2013) (security interest does exist).

Property of the estate—Exemptions—Objection to exemption—Timeliness: Under Bankruptcy Rule 2003(e), as amended effective December 1, 2011, the only method for adjourning a meeting of creditors is by announcing the continued date and time at the meeting to be continued, coupled with the prompt filing of that announcement on the case docket. Here, the meeting of creditors was held on November 6, 2012; no adjournment to a specific date and time was announced at the meeting; and nothing in that regard was filed in the case docket. Therefore, the meeting “concluded” on November 6, 2012; the deadline for filing an objection to the debtor's exemptions was December 6, 2012; and the Chapter 7 trustee's objection

filed on December 28, 2012 was untimely. In re Vierstra, --- B.R. ----, 2013 WL 1401494 (Bankr. D. Mass. April 8, 2013).

Property of the estate—Exemptions—Of retirement account under Code §

522(b)(3)(C): Breaking a long winning streak for debtors on this issue, the Seventh  Circuit Court of Appeals held that a non-spousal inherited individual retirement account does not represent “retirement funds” in the hands of the debtor who inherited the IRA and therefore is not exempt under Code § 522(b)(3)(C) and § 522 (d)(12), both of which exempt “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Under 26 U.S.C. §402(c)(11)(A), a non-spousal inherited IRA (i.e., an IRA inherited from a person other than the debtor’s spouse) must begin distributing its assets within a year of the original owner's death. Payout must be completed in as little as five years (though the

time can be longer for some accounts). In other words, an inherited IRA is a timelimited tax-deferral vehicle, but not a place to hold wealth for use after the new owner's retirement. Finding this an “easy” decision, the court disagreed with In re Chilton, 674 F.3d 486 (5th Cir. 2012) and In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir.2010). Acknowledging that this decision created a circuit conflict, the court said that it “circulated the opinion before release to all judges in active service. None of the judges requested a hearing en banc.” In re Clark, --- F.3d ----, 2013 WL 1729600 (7th Cir. April 23, 2013).

Property of the estate—Exemptions—Under state law: Two more courts upheld the Kansas bankruptcy-specific exemption of the right to receive a federal and state earned income tax credit. In these cases, the Chapter 7 trustee, rather than attacking the constitutionality of the state statute, contended that, under Code § 544(a)(2), the trustee, “as lien creditor and as successor to certain creditors and purchasers,” could gain access to an earned income tax credit in the debtor’s hands because an individual outside bankruptcy is not allowed to exempt the credit. The court replied, however, that while under § 544(a)(2) the trustee may stand in the shoes of a creditor to claim that creditor's hypothetical priority in property of the estate, exempt property is not property of the estate, so § 544(a)(2) is simply inapplicable. In re Murray, 2013 WL 1795676 (Bankr. D. Kan. April 29, 2013); In re Beach, 2013 WL 1795598 (Bankr. D. Kan. April 29, 2013).

Violation of stay—Failure to return repossessed vehicle: The Second Circuit Court of Appeals held that a secured motor vehicle creditor's refusal to return a vehicle, lawfully repossessed prepetition, to the debtor promptly upon learning of the debtor’s Chapter 13 bankruptcy filing constitutes an unlawful exercise of control over the property of the debtor’s bankruptcy estate in violation of the automatic stay. Under New York law, the debtor retained at least an equitable interest in the vehicle notwithstanding its repossession, and U.S. v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) teaches that, upon the debtor’s filing of his bankruptcy petition, the debtor’s equitable interest under state law gave the bankruptcy estate a possessory right in the secured property, as property that the trustee could use under  Code § 363. Under Code § 542, that right took precedence over the creditor’s state law right of possession of the collateral. In re Weber, --- F.3d ----, 2013 WL 1891371.

(2nd Cir. May 8, 2013)

May 2013 NH Bankruptcy Decisions: Late Filed POC Denied (In re Petuck) with Bar Date Strictly Construed in Ch. 13.

In re Petuck, 2013 BNH 003 (Bankr. D.N.H. 2013)(May 17, 2013, J. Michael Deasy, Bankruptcy Judge).

Debtors’ Motion to Reconsider denial to file a late POC on behalf of the creditor was denied. Cause and excusable neglect were not found to allow the deadline to be extended. The time frames to file a POC in a Chapter 13 are in essence strictly construed.

Further, a motion to reconsider does not exist, but rather the debtors had the option to file either a motion to alter/amend judgment [Rule 59(e)] or motion for relief from judgment [Rule 60(b)], for which each has its own time frames and proofs.  If a motion is served within [fourteen] days of the rendition of judgment, the motion ordinarily will fall under Rule 59(e). If the motion is served after that time, it falls under Rule 60(b). Debtors' motion was filed within fourteen days and considered then a motion to alter or amend the Order under Bankruptcy Rule 9023, which makes Rule 59 applicable. To succeed on a Rule 59(e) motion, a moving party must establish a manifest error of law or fact or must present newly discovered evidence. Here, the Debtors allege an error of law as the grounds for relief.

The Motion makes two arguments. First, that the Debtors did not seek to enlarge the time to file a proof of claim under Bankruptcy Rule 3002(c) (time for filing claims by creditors or equity security holders), but rather under Bankruptcy Rule 3004 (time for filing claims by debtors or trustees). The Debtors argue that Bankruptcy Rule 9006(b)(3) does not restrict the Court’s authority to extend the Bankruptcy Rule 3004 deadline by way of 9006(b)(1), the general rule on extending deadlines. Second, the Debtors argue that their failure to file a claim within Bankruptcy Rule 3004's deadline was a result of excusable neglect.

Debtors filed a chapter 13 plan and intended to cure the mortgagee's arrearage through the plan. Mortgagee did not file  POC by the bar date of 1/13/13. Bankruptcy Rule 3004, the deadline for the Debtors or Trustee to file a proof of claim was 2/13/12 and Debtors did not do.  Debtors filed the Enlargement Motion, requesting that the Court extend the then-expired deadline to file a proof of claim to March 20, 2013, which the court denied. The Enlargement Motion states that Debtors’ counsel neglected to file a proof of claim by the deadline because the deadline “was not entered into [counsel’s] calendar.” The Motion states that Debtors’ counsel “believed that the creditor would file a proof of claim as is customary for a secured creditor. Further, the [D]ebtors were in active loan modification negotiations with the creditor and it was believed that an agreement would be reached.” Finally, the Motion states that the Debtors “requested approval from the court to file a proof of claim as soon as it became apparent that the creditor had failed to do so.” The Motion argues that there will be no delay to the proceedings if the Order is vacated and the Enlargement Motion is granted.

Bankruptcy Rule 9006(b)(1) grants the Court general discretion to extend deadlines under the Bankruptcy Code and Bankruptcy Rules subject to certain conditions and limitations. Under Bankruptcy Rule 9006(b)(1), if a deadline has expired without extension, the Court can extend the deadline if the moving party can show that its failure to act was the result of excusable neglect, subject to certain limitations on extending deadlines enumerated in subsections (b)(2) and (b)(3). The deadline under Bankruptcy Rule 3004 had expired before the Motion was filed.

Bankruptcy Rule 9006(b)(3) states that the Court may extend the deadline under Bankruptcy Rule 3002(c), i.e., the time for filing a proof of claim, only to the extent and under the conditions stated in Bankruptcy Rule 3002(c). Bankruptcy Rule 3002(c) states the general rule that a proof of claim must be filed within 90 days after the first date set for the first meeting of creditors. Subsections (1) through (6) of Bankruptcy Rule 3002(c) state certain limited instances in which the Court may extend the general deadline. The Debtors did not allege or argue that any of the enumerated exceptions to the general deadline applied to the Extension Motion, and excusable neglect is not a ground for an extension of the filing deadline under Bankruptcy Rule 3002(c).

In the Motion, the Debtors argue that they were not seeking to extend the deadline under Bankruptcy Rule 3002(c), but rather under Bankruptcy Rule 3004. They contend that because Bankruptcy Rule 3004 is not enumerated in Bankruptcy Rule 9006(b)(2) or (b)(3), the Court may grant an extension upon a showing of excusable neglect. The Court is satisfied that after the expiration of the deadline under Bankruptcy Rule 3004 it may “for cause shown” and upon a finding of excusable neglect extend the deadline. Bankruptcy Rule 9006(b)(1). See In re Sykes, 451 B.R. 852, 862 (Bankr. S.D. Ill. 2011); In re Schuster, 428 B.R. 833, 837 (Bankr. E.D. Wisc. 2010). In this case, because the deadline the Debtors are seeking to extend has expired without extension, the Court may only extend the deadline upon a showing of both cause and excusable neglect.

Bankruptcy Rule 9006(b)(1) merely allows a court to extend an expired deadline upon a showing of excusable neglect; it does not require it. Pioneer Inv. Servs. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 399 (1993). A determination of excusable neglect is at base an equitable determination, which takes account of “all relevant circumstances surrounding a party’s omission”. Id. at 395 (emphasis added). Some of the relevant factors to consider include:
“the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.

Here, the length of the delay was considerable. The deadline for FNMA to file a proof of claim expired on January 14, 2013 without the creditor having filed a claim. This should have put the Debtors on alert that they had until February 13, 2013, pursuant to Bankruptcy Rule 3004, to file a claim on FNMA’s behalf. However, that deadline came and went without a claim or a motion to extend the deadline being filed. Only on March 13, 2013, a full month after the deadline passed and on the eve of the confirmation hearing on the Debtors’ Plan, did the Debtors seek to extend the deadline. The Debtors state that they requested an extension of the deadline “as soon as it became apparent” that FNMA had failed to file a claim. However, Bankruptcy Rule 3004 provides a thirty day time period for the Debtors to determine if a claim has been filed and, if not, to file a claim for the creditor. The Motion is, in essence, asking the Court to double the period of time for the Debtors to act under Bankruptcy Rule 3004. Such relief might be available upon a showing of cause and excusable neglect.

According to the Debtors, the reasons for the delay included: 1) failure to enter the deadline into counsel’s calendar; 2) a belief that FNMA would file a proof of claim; and 3) existence of ongoing loan modification negotiations between the Debtors and FNMA. These reasons for delay do not establish cause for an extension.

The policy behind the strict deadline for filing of proofs of claim in chapter 13 proceedings is in material part based on the goal of prompt confirmation of a plan, the allowance of claims and commencement of distributions to creditors holding allowed claims. Unreasonable delay in the confirmation of a plan and the allowance of claims is detrimental to the interests of all creditors and the ultimate fresh start for debtors. The deadlines for the filing of claims in a chapter 13 proceeding have been established to avoid delays which would be prejudicial to creditors, as well as debtors.

The adoption of the Debtors’ arguments would, in effect, eliminate the deadlines placed on the timely filing and prompt resolution of claims in chapter 13 proceedings. Such a result requires a high standard for the “cause” to permit such a deviation. In this case, the Motion makes clear that both the Debtors and the creditor were in communication about this claim and simply failed to timely file a proof of claim. No external factors, mistake, or circumstances beyond the control of the parties has been alleged, much less established. Accordingly, the Court does not find cause under Bankruptcy Rule 9006(b)(1) to extend the date.

The only excusable neglect offered is a failure to calendar the deadline.  However, for the reasons discussed in the preceding section on cause, there may be neglect, but it is not excusable.

The totality of the circumstances of the case and the interests of efficient judicial administration of this chapter 13 proceeding weigh in favor of not extending the deadline under Bankruptcy Rule 3004 under the standards established by Bankruptcy Rule 9006(b)(1).

Click here for full decision:
http://www.nhb.uscourts.gov/Opinions/Judge_Deasy/2013BNH003-Petuck.pdf

"Defalcation" in context of bankruptcy discharge defined by the Supreme Court in Bullock v. Bankchampaign, N.A. May 13, 2013

Click here for the full decision:

http://www.supremecourt.gov/opinions/12pdf/11-1518_97be.pdf

Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the (nonprofessional) trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a judgment against him in state court for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on certain of petitioner’s interests—including his interest in the original trust—in order to secure petitioner’s payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of petitioner’s state court-imposed debts to the trust, and the Bankruptcy Court granted respondent summary judgment, holding that petitioner’s debts were not dischargeable pursuant to 11 U. S. C. §523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt“for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”  The Federal District Court and the Eleventh Circuit affirmed. The latter court reasoned that “defalcation requires a known breach of fiduciary duty, such that the conduct can be characterized as objectively reckless.”
Held: The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.

(a) While “defalcation” has been an exception to discharge in a bankruptcy statute since 1867, legal authorities have long disagreed about its meaning. Broad definitions of the term in modern and older
dictionaries are unhelpful, and courts of appeals have disagreed about what mental state must accompany defalcation’s definition.

(b) In Neal v. Clark, 95 U. S. 704, this Court interpreted the term “fraud” in the Bankruptcy Code’s exceptions to discharge to mean “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, as does embezzlement; and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality.” Id., at 709. The term “defalcation” should be treated similarly. Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty.

(c) Several considerations support this interpretation.

First, statutory context strongly favors it. The canon noscitur a sociis argues for interpreting “defalcation” as similar to its linguistic neighbors “embezzlement,” “larceny,” and “fraud,” which all require a showing of wrongful or felonious intent. See, e.g., Neal, supra, at 709.

Second, the interpretation does not make the word identical to its statutory neighbors. “Embezzlement” requires conversion, “larceny” requires taking and carrying away another’s property, and “fraud” typically
requires a false statement or omission; while “defalcation” can encompass a breach of fiduciary obligation that involves neither conversion, nor taking and carrying away another’s property, nor falsity.

Third, the interpretation is consistent with the longstanding principle that “exceptions to discharge ‘should be confined to those plainly expressed.’ ” Kawaauhau v. Geiger, 523 U. S. 57, 62.
It is also consistent with statutory exceptions to discharge that Congress normally confines to circumstances where strong, special policy considerations,such as the presence of fault, argue for preserving the debt, thereby benefiting, for example, a typically more honest creditor. See, e.g., 11 U. S. C. §523(a)(2)(A).

Fourth, some Circuits have interpreted the statute similarly for many years without administrative or other difficulties. Finally, it is important to have a uniform interpretation of federal law, the choices are limited, and neither the parties nor the Government has presented strong considerations favoring a different

Vacated and remanded.
BREYER, J., delivered the opinion for a unanimous Court.

Challenge to foreclosure dismissed due to res judicata.

Merrick v. CitiMortgage, Inc., 2013 DNH 027 (DNH 2013)

March 5, 2013, Opinion by Judge Steven J. McAuliffe

District Court dismissed (granting mortgagee's 12(b)(6) motion) the pro se litigants' challenge to the mortgagee's foreclosure, finding the issues were already decided in the underlying bankruptcy case.

Pro se litigants (Mr. and Mrs. Merrick) challenged CitiMortgage's right to foreclose, averring that CitiMortgage had not demonstrated to their satisfaction that they held the mortgage, and thus able to foreclose. CitMortgage removed the case from state to federal court, and moved to dismiss on the grounds of res judicata, arguing that the issue had already been litigated and decided by the Bankruptcy Court in the Merricks' Chapter 13 case. The  Merricks' bankruptcy case and related adversary proceeding against CitiMortgage had been dismissed by the bankruptcy court for, inter alia, the Merricks' delay and failure to comply with court orders.

The essential elements of res judicata are: "(1) a final judgment on the merits in an earlier action; (2) an identity of parties or privies in the two suits; and (3) an identity of the cause of action in both the earlier and later suits." FDIC v. Shearson-American Express, Inc., 996 F.2d 493, 497 (1st Cir. 1993). Here, each of those essential elements is present. First, As noted above, the bankruptcy court dismissed Mr. Merrick's
bankruptcy petition for cause and subsequently dismissed his adversary complaint as well. Neither order contains any language suggesting that the dismissal was without prejudice to Mr. Merrick's refiling his claim
against CitiMortgage. The order dismissing his adversary complaint was, then, an adjudication on the merits of that claim. See Fed. R. Bank. P. 7041(b) ("If the plaintiff fails to prosecute or to comply with these rules or a court order, a defendant may move to dismiss the action . . . Unless the dismissal order states otherwise, a dismissal under this subdivision. . . . operates as an adjudication on the merits."). See also Fed. R.
Civ. P. 41((b). 

Secondly, regarding the Identity of Parties or Privies: CitiMortgage is the defendant in both the present action and the previously-dismissed adversary proceeding in the bankruptcy court. The only
difference in parties in the two actions is that Mrs. Merrick is also a plaintiff in this proceeding. As the court of appeals has noted, when the plaintiffs "are nominally different[,] . . . the question reduces to whether the plaintiffs, though not identical, are sufficiently in privity to satisfy this element." In re Colonial Mortgage Bankers Corp., 324 F.3d 12, 17 (1st Cir. 2003). They are. Although she was not a named plaintiff in her husband's adversary complaint against Citi Mortgage, Mrs. Merrick's interests were adequately represented in the bankruptcy proceeding insofar as: (1) her interests and those of her husband were virtually identical with regard to the claim against Citi and Mr. Merrick's efforts to prevent the foreclosure upon the couple's home; and (2) she would have benefited to the same extent as her husband, if he had prevailed on his claims against Citi in the bankruptcy court. In fact, Mr. Merrick tacitly acknowledged his wife's interest in the adversary proceeding when he signed his adversary complaint against Citi as the "authorized representative for John & Joanne Merrick." Accordingly, the second element of res judicata - identity of parties or privies - is satisfied. See, e.g., Eubanks v. FDIC, 977 F.2d 166, 170 (5th Cir. 1992) (holding that wife's interests were sufficiently well-represented in husband's bankruptcy proceeding to give it res judicata effect against her); Cuauhtli v. Chase Home Fin. LLC, 308 Fed. Appx. 772, 773 (5th Cir. 2009) (holding that husband and wife were in privity, such that wife's prior suit challenging legality of foreclosure proceedings precluded subsequent similar claims by her husband); In re Rhoads, 2012 WL 603652 (9th Cir. BAP 2012) (finding privity between a husband and wife with regard to claims arising out of the foreclosure of jointly owned property); Hintz v. JP Morgan Chase Bank, N.A., 2011 WL 579339, *7 (D. Minn.,2011) ("The First Lawsuit involved the same parties, or their privities, as the current lawsuit. Here, Mr. Hintz, one of the two Plaintiffs in this case, was the plaintiff in the state lawsuit. As a joint owner of the Property, Ms. Hintz, the second Plaintiff in this case, was in privity with Mr. Hintz. Two parties who have similar interests in the same realty are in privity.") (citation and internal punctuation omitted).

Third, regarding the Identity of the Cause of Action:Finally, there can be little doubt that the claim the Merricks' advance against Citi in this proceeding is identical to the one Mr. Merrick pursued against Citi in his adversary proceeding. Both actions involve allegations of Citi's lack of "standing" to enforce the judicial
sale provisions of the mortgage deed; both actions rely on allegations that Citi lacks a "proof of claim" that would allegedly demonstrate its legal authority to foreclose the mortgage; and both actions allege that
Citi is not the current holder in due course of the mortgage deed, with power/authority to enforce it. Compare Adversary Complaint (document no. 4-3) with Motion to Order a Temporary Restraining Order (document no. 1-1).

click here for the full opinion:  Click here: ISYS:web 8

Social Security Income is not included in Chapter 13 Plan (great news from NACBA)

  The National Consumer Bankruptcy Rights Center (NCBRC), NACBA’s 501(c)(3) offshoot, scored an important win in the Ninth Circuit yesterday.  In, In re Welsh, 2013 U.S. App. LEXIS 5880 (9th Cir. 2013), that court of appeals joined the Fifth and Tenth Circuits in holding that it was not bad faith for a debtor to decline to devote social security income to paying unsecured creditors in a chapter 13 plan.  The court rejected the trustee’s argument that this allowed the debtor to have money left over that could be used to pay creditors, stating that:

Congress chose to remove from the bankruptcy court's discretion the determination of what is or is not "reasonably necessary.” It substituted a calculation that allows debtors to deduct payments on secured debts in determining disposable income. That policy choice may seem unpalatable either to some judges or to unsecured creditors. Nevertheless, that is the explicit choice that Congress has made. We are not at liberty to overrule that choice.

In fact, the court followed the Eighth Circuit in holding that the issue of how much creditors are paid should not even be a part of the good faith analysis, now that Congress has adopted the disposable income test.

            Equally as important, the court rejected the trustee’s argument that the debtors should not be permitted to continue to pay for “luxury” secured debts (on two ATVs and an Airstream trailer) “at the expense” of their unsecured creditors. Again, the court found that the statutory language is clear:

The calculation of "disposable income" under the BAPCPA requires debtors to subtract their payments to secured creditors from their current monthly income. In enacting the BAPCPA, Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to reach a disposable income figure. Given the very detailed means test that Congress adopted, we cannot conclude that this omission was the result of oversight. Moreover, even if it were, we would not be justified in imposing such a limitation under "the guise of interpreting 'good faith.’”

click here for the full text of the Welsh Opinion 

from the web site of the 9th Cirucit Court of Appeals:

Click here: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/03/25/12-60009%20web%20revised.pdf

The brief for NCBRC was written by Geoff Walsh of the National Consumer Law Center.

Henry Sommer, NACBA President Emeritus; Chair, Amicus Committee.

Recent Bankruptcy Cases from around the Circuits: Jan - March 2013.

NACBA is the national Association of Consumer Bankruptcy Attorneys, for which I am a member.  They provide “Cases in Review”, which  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).

Settlement proceeds are not included as part of plan funding as they are not part of the projected disposable income:

Connor v. Carroll, --- Fed. Appx. ----, 2013 WL 150150 (6th Cir. Jan. 15, 2013).

Chapter 13—Confirmation of plan—Calculation of projected disposable income: The proceeds of the settlement of a prepetition personal injury claim, received post-petition by the Chapter 13 debtors, did not constitute projected disposable income of the debtors as the proceeds were not known or virtually certain at the time of confirmation of their plan. Accordingly, the debtors did not have to remit the proceeds to the Chapter 13 trustee for distribution to unsecured creditors.  

Paying tax sale purchaser’s claim:

In re Romious, --- B.R. ----, 2013 WL 221432 (Bankr. N.D. Ill. Jan. 18, 2013). Chapter 13—Confirmation of plan—Treatment of secured claims—Propriety of inclusion in plan: A Chapter 13 plan may modify a tax sale purchaser’s secured claim by paying it in installments over the term of the plan, so long as the redemption period has not expired prior to the debtor’s bankruptcy filing.

Contract rights come within the purview of the anti-discrimination statute, applying here to IRS OIC:

In re Mead, 2013 WL 64758 (Bankr. E.D. N.C. Jan. 4, 2013).

Discrimination against debtor: In a case that appears to be the first of its kind, the bankruptcy court held that an interpretation of the Chapter 13 debtors’ offer in compromise, which the IRS had accepted prepetition, as voiding the offer in compromise upon the debtors’ bankruptcy filing would constitute discrimination against the debtors in violation of Code § 525(a). Although abrogation of contract

rights is not explicitly listed in the prohibited discriminatory acts mentioned in § 525(a), the legislative history of the section makes it clear that the list is not meant to be exhaustive, and the court concluded that contract rights clearly come within the purview of § 525(a). Accordingly, the court would interpret the offer in compromise in a manner not violating § 525(a); under this interpretation, the offer in compromise remained in effect, and the IRS could file a proof of claim only for the amount due under the agreement, as well as for amounts due for tax years not covered by the offer in compromise.

State did not discriminate as “employment” did not apply regarding interim appointment to position otherwise elected:

Chasensky v. Walker, 2013 WL 160273 (E.D. Wis. Jan. 14, 2013).

Discrimination against debtor: In an action in which a debtor in a pending bankruptcy case claimed that the governor of Wisconsin violated Code § 525(a) by failing to appoint her to an interim position of county register of deeds after he discovered that she had filed a bankruptcy petition, the court held that the word “employment” in Code § 525(a) does not encompass an interim appointment by a state governor to an otherwise elected position.  Accordingly, the court granted the United States’ motion for a rehearing of the decision in Chasensky v. Walker, 2012 WL 1287659 (E.D. Wis. April 16, 2012), which held that the states had not waived their sovereign immunity as to the appointment powers of a state's duly-elected governor. Applying the doctrine of constitutional avoidance, the court instead decided the

viability of the debtor’s claim as a matter of statutory interpretation .

“house hold” = “economic unit”:

In re Reinsch, 2013 WL 256734 (Bankr. D. Neb. Jan. 23, 2013).

Means test—Household size: Agreeing with In re Robinson, 449 B.R. 473 (Bankr. E.D. Va. 2011), the court said that the term “household” as used in Code § 1325(b) includes the debtor and the persons who operate in the aggregate with the debtor as an “economic unit.” Thus, here, the above-median Chapter 13 debtor could calculate her expenses under the means test by using a household size of three, rather than two, even though this included the debtor’s oldest child, a 20–year–old full-time college

student attending a school out of state. The debtor testified that her daughter returned home during school breaks and on some weekends and that the debtor provided substantial financial support to her, including college expenses, food, clothing, car insurance, and cellular phone. It seemed clear that the oldest daughter was, at this time, a part of the household economic unit.

Nonfiling spouse’s social security benefits not included in debtor’s current monthly income:

In re Scott, 2013 WL 140461 (Bankr. M.D. Ga. Jan. 11, 2013). Contribution by nondebtor: In one of the few decisions to explicitly address this issue, the court found In re Miller, 445 B.R. 504 (Bankr. D. S.C. 2011) more persuasive than In re Olguin, 429 B.R. 346 (Bankr. D. Colo. 2010) and held that Social Security benefits received by a person other than the debtor, such as the debtor’s nonfiling spouse, are not included in the debtor’s current monthly income defined in Code § 101(10A) even where the person’s other income is included in the debtor’s current monthly income under § 101(10A)(B) as paid “on a regular basis for the household expenses of the debtor or the debtor's dependents.” Accordingly, in a Chapter 13 case these Social Security benefits are not included in the debtor’s “projected disposable income.”

Means Test: Distinguishing between joint and individual expenses for the nonfiling spouse in current monthly income:

 In re Toxvard, --- B.R. ----, 2013 WL 122508 (Bankr. D. Colo. Jan. 9, 2013). Contributions on a regular basis by a nondebtor are included in a debtor’s “current monthly income” under Code § 101(10A)(B) only where the contribution is for (1) “household expenses,” (2) “of the debtor or the debtor's dependents.”  Here, all of the expenses paid by the debtor’s nonfiling husband were “household expenses,” so that the determinative issue was whether each expense was an expense “of the debtor” (there being no dependents in the household). Accordingly, if a household expense was the debtor's sole expense, then the debtor needed to include her husband’s entire payment of the expense in the calculation of her current monthly income. If a household expense was the husband’s sole expense, then the debtor could deduct the entire expense from her calculation. If a household expense was a joint obligation, then the debtor needed to include the husband’s payment of the expense in her calculation, but only to the extent the husband’s payment satisfied the debtor's share of the obligation. Absent evidence to the contrary, this amount would be 50 percent of the total expense.

Kansas state exemption on earned income credits does not violate the Uniformity Clause:

 In re Westby, --- B.R. ----, 2013 WL 415599 (B.A.P. 10th Cir. Feb. 4, 2013).

Affirming In re Westby, 473 B.R. 392 (Bankr. D. Kan. April 4, 2012), the Bankruptcy Appellate Panel held that a new Kansas statute, Kan. Stat. Ann. § 60-2315, that permits a debtor in bankruptcy, but not a general debtor, to exempt the right to receive a federal and state earned income tax credit does not violate either the Uniformity Cause, or the Supremacy Clause, of the U.S. Constitution. The BAP said that it agreed with the bankruptcy court’s detailed analysis and reasoning and found it unnecessary to duplicate that court’s extensive efforts. The BAP also noted that, subsequent to the bankruptcy court’s decision, the Sixth Circuit Court of Appeals, in In re Shafer, 689 F.3d 601 (6th Cir. 2012), upheld the constitutionality of a Michigan bankruptcy-only homestead exemption statute.

Wells Fargo class certification for signing affidavits without personal knlwedge or failing to be notarized in the presence of the notary:

 In re Brannan, --- B.R. ----, 2013 WL 85158 (Bankr. S.D. Ala. Jan. 8, 2013).

Although the court in its earlier opinion, In re Brannan, 2011 WL 5331601 (Bankr. S.D. Ala. Nov. 7, 2011), declined to certify a class in a proposed class action, the court concluded that the plaintiffs had now demonstrated that the prerequisites for the certification of two classes in a proposed class action were satisfied. The class action asserts that Wells Fargo committed fraud on the court through its practices in generating affidavits filed in connection with motions for relief from stay. Specifically, the action asserts that (1) persons signing affidavits did not, in fact, possess personal knowledge of the facts stated in the affidavits, as the affidavits represented; and (2) the person signing the affidavits did not actually sign them in the presence of a notary public, as represented in the affidavits. These allegations, if established, warranted relief, the court concluded, both under Code § 105(a) and under the court’s inherent authority to punish contempt of the court.

Can’t force secured creditor to foreclose, thus no discharge violation:

 In re Canning, --- F.3d ---, 2013 WL 388060 (1st Cir. Feb. 1, 2013).

The refusal by the Chapter 7 debtors’ mortgage creditor to accede to the debtors’ demand that the creditor either foreclose the mortgage on their residence, which the debtors had surrendered and vacated, or release its lien on the property did not violate the discharge injunction. Distinguishing In re Pratt, 462 F.3d 14 (1st Cir. 2006), in which the court held that a secured creditor's refusal to foreclose or release its lien on an inoperable, worthless car was intended to objectively coerce the debtor into paying a discharged debt, the court observed that the creditor offered to release its lien through either a settlement offer or a short sale, which indicated the intent to collect no more than the value secured by the underlying lien, as well as a willingness to negotiate a palatable solution for all involved. 

Foreclosure: First Circuit would not force mortgagee to foreclose.

Canning v. Beneficial Maine, Inc. (In re Canning), ___ F.3d ___(1st Cir. Feb. 1, 2013).

The refusal by the Chapter 7 debtors’ mortgage creditor to accede to the debtors’ demand that the creditor either foreclose the mortgage on their residence, which the debtors had surrendered and vacated, or release its lien on the property did not violate the discharge injunction. Distinguishing In re Pratt, 462 F.3d 14 (1st Cir. 2006), in which the court held that a secured creditor's refusal to foreclose or release its lien on an inoperable, worthless car was intended to objectively coerce the debtor into paying a discharged debt, the court observed that the creditor offered to release its lien through either a settlement offer or a short sale, which indicated the intent to collect no more than the value secured by the underlying lien, as well as a willingness to negotiate a palatable solution for all involved.

Click here for the full opinion from the court's web site:  Click here: USCA1 Opinion

First Circuit BAP: Feb. 2013: (a) mortgage avoidance and thus home sale by Ch. 7 Trustee, and (b) plan dismissal/limitation on re-filing.

BAP affirms order dismissing debtor's ch. 13 case and denying him ability to refile for 18 months;
discussion of "waiver" of issues on appeal and the standard for "excusable neglect":

Rivera v. Asume, Rivera, Chapter 13 Trustee (In re Rivera), (1st Cir. BAP 2/19/13)(Before Judges Hillman, Boroff, and Kornreich: Opinion by Kornreich).

This was the third Chapter 13 plan, the prior two dismissed for the debtor's failure to meet domestic support obligations; and this time for similar reasons along with failure to produce current tax returns and other relevant information to the trustee.

Rivera:

Click here: USBAP1 Opinion 12-036P

 What happens after the trustee avoids the mortgage? He gets to sell your house:

DiGiacomo, Chapter 7 Trustee v. Traverse (In re Traverse), (1st Cir. BAP 2/4/13)(Before Judges Haines, Deasy, Tester: Opinion by Haines).

BAP affirmed summary judgment in the Chapter 7 trustee's favor in denying the debtor's request to limit the scope of the sale of her home.  Debtor owed a first mortgage, which the mortgagee failed to record, and Debtor owed a second mortgage which was recorded, and Debtor recorded a $500,000 Massachusetts homestead. Trustee moved to avoid the first, unrecorded, mortgage for the benefit of creditors, which was granted. Debtor objected to any sale of her home, claiming her mortgages were paid current and could not be foreclosed even if the first mortgage was not recorded and thus avoided for the benefit of creditors.  Trustee successfully argued that the avoided mortgage was for the benefit of creditors (the unrecorded first mortgage) creating equity in the home which the trustee could sell, the trustee now standing in the shoes of the homeowner's right to possession and redemption.  Her homestead would be satisfied in the order of priorities after the first mortgage (avoided for the benefit of creditors) and second mortgage were paid, and then the homestead.

Traverse:

Click here: USBAP1 Opinion 12-025P

Recent Decisions from the First Circuit regarding: (a) Ethics, (b) Foreclosure, (c) Taxes & (d) Discovery.

Be careful what you say about opposing counsel:

Gilberti v. Coppola, No. 12-1302 (1st Cir. 2/27/13).

District court's decision admonishing interested party-attorney for unprofessional conduct in his representation of a junior mortgagor related to the sale of the foreclosed property, is affirmed, where: 1) attorney's claim that opposing attorney converted funds was never supported by any evidence; 2) attorney's allegation that opposing attorney violated the criminal usury statute was frivolous; and 3) attorney turned what seemed to be innocent misunderstandings into claims of perjury in his allegations of false statements.

GILBERTI:  Click here: USCA1 Opinion

Timing for challenge to lender's good faith and fair dealing: 

Latson v. Plaza Home Mortgage, Inc., No. 12-1462 (1st Cir. 2/27/13).

Dismissal of plaintiffs' suit against defendant-mortgage lender alleging state common law and statutory violations in making two house loans is affirmed, where: 1) the good faith and fair dealing claim was properly dismissed because the allegedly wrongful conduct all occurred before the contracts existed, not in violation of their terms after formation, and the covenant only governs conduct of parties after they have entered into a contract; and 2) the statutory claim is time-barred - the statute of limitations for a 93A action is four years, which had  elapsed prior to suit.The specific allegations were that prior to closing Plaza failed to provide Latson with a proper commitment letter, good-faith estimate, or other documents required by the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601–2617, and gave them insufficient opportunity to review the terms of the loans. They also claimed that Plaza either "knew or should have known" that an appraisal of the property that the Latsons obtained at Plaza's request was "too high." The Latsons asserted that all these acts and omissions were actionable under both their common-law and statutory claims.

LATSON:  Click here: USCA1 Opinion

Challenge to IRS' "failure to pay" penalty fails:

Shafmaster v. US, No. 12-1726 (1st Cir. 2/11/13).

Summary judgment was properly granted to defendant on plaintiffs' claim for refund of a failure-to-pay penalty imposed on them by the Internal Revenue Service, where: 1) equitable estoppel does not apply because plaintiffs fail to allege affirmative misconduct on the part of defendant, and none of the documents promised to waive the penalty, and some explicitly warned of the penalty, so there was no definite misrepresentation of fact contained therein as to whether the penalty would be assessed; 2) since plaintiffs did not show inability to pay or undue hardship, they cannot seek refuge in the "reasonable cause" exception; and 3) plaintiff's arguments regarding notice and demand all fail.

Shafmaster:   Click here: USCA1 Opinion

Alleged mortgagee needed to posses the "power of sale" at the time they foreclosed; thus mortgagor's questioning the the assignment did not take place prior to the foreclosure was proper; one who exercises power of sale must strictly follow its terms:

Juarez v. Select Portfolio Servicing, No. 11-2431 (1st Cir. 2/12/13):

Judgment dismissing complaint alleging defendants illegally foreclosed on her home is reversed and remanded, where the complaint states plausible claims for relief and that the district court abused its discretion in deciding that it would be futile to allow an amendment to the complaint. Juarez properly alluded to a challenge that the assignment did not take place prior to the foreclosure thus, the foreclosing entity did not have the "power of sale" at the time they exercised it - which is a different challenge than a mortgagor's challenge to the validity of a third-party assignment.  The issue of whether a "confirmatory assignment" cured the alleged defect was properly the subject of discovery and the complaint should have proceeded on that point.  One who exercises the power of sale must strictly follow its terms. In this Massachusetts case, an assignment of the mortgage must take place before the foreclosure begins. Further, in light of this, the plaintiff should be allowed to amend and re-plead her fraud and Section 93A claims (Mass. Consumer Protection Statute).  Massachusetts covenant of good faith and fair dealing is taken to be implied in every contract, and provides "that neither party shall do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract" - the covenant only "governs conduct of parties after they have entered into a contract.

Juarez:  Click here: USCA1 Opinion

In a case of first impression, mortgagor has standing to challenge assignment of mortgage if to do so renders the assignment void, rather than voidable:

Culhane v. Aurora Loan Services of Nebraska, No. 12-1285 (1st Cir. 2/15/13).

In a case of first impression, the court held that the mortgagor possesses standing to challenge the assignment of its mortgage to another entity.  "Withal, a mortgagor does not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title." - thus, making the distinction that the challenge must be that the assignment is "void", rather than "voidable". Thus, here, the mortgagor (namely the borrower or home owner at issue) has standing to contest the validity of the mortgage assignment made by Mortgage Electronic Registration Systems, Inc. (MERS), to defendant, the foreclosing entity; however, the MERS framework and defendant's foreclosure of plaintiff's property complied with the requirements of Massachusetts mortgage law, and thus the foreclosure was lawful. Applying Massachusetts law, the court noted that in Massachusetts, the note and mortgage may be held by separate entities. Further, the terms of the mortgage (contract) authorized the transfer at issue. 

"[I]n Massachusetts, a mortgagor has a legally cognizable right to challenge a foreclosing entity's status qua mortgagee. This may, in certain instances, require challenging the validity of an assignment that purports to transfer the mortgage to a successor mortgagee.  Standing doctrine is meant to be a shield to protect the court from any role in the adjudication of disputes that do not measure up to a minimum set of adversarial requirements.  There is no principled basis for employing standing doctrine as a sword to deprive mortgagors of legal protection conferred up them under state law.  We hold, therefore, that a mortgagor has standing to challenge the assignment of a mortgage on her home to the extent tat such a challenge is necessary to context a foreclosing entity's status qua mortgagee.  We caution that our hold, narrow to begin with, is further circumscribed.  We hold only that a mortgagor has standing to challenge a mortgage assignment as invalid, ineffective, or void (if, say, the assignor had nothing to assign or had not authority to make an assignment to a particular assignee).  If successful, a challenge of this sort would be sufficient to refute an assignee's status qua mortgagee . . . Withal, a mortgagor doe not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title."

Click here: USCA1 Opinion

Discovery, Work-product & Waiver:

Walker v. NH AOC, 2013 DNH 025 (D.N.H. 2013)(Magistrate McCafferty)(court reviewed discovery materials in camera, and determined many must be produced, articulating the parameters of work-product, privilege and waiver).

Click here: ISYS:web 8

FORECLOSURE: Homeowner's legal challenges must occur BEFORE the foreclosure sale auction of their home occurs, per the Federal Court.

In a recent opinion issued by the Federal District Court in New Hampshire, Chief Judge Laplante held that challenges to the foreclosure must occur BEFORE the foreclosure sale is held, relying upon NH R.S.A. 479:25,II.   See Calef v. Citibank, N.A. et. al., CV-11-526 (D.N.H. 2/21/13).

Click here for the full text of the opinion, which can be found on the Court's web site:

Click here: ISYS:web 8

The Calef case involved the federal court sitting in diversity, applying the state law as the court so interpreted it.  In so ruling, the court relied upon Gordonville Corp. N.V. v. LR1-A Ltd. P'ship, 151 N.H. 371, 377 (2004); Murphy V. Fin. Dev. Corp., 126 N.H. 536, 540 (1985); People's Utd. Bank. v. Mtn. Home Developers of Sunapee, LLC, 858 F. Supp. 2d 162, 167-68 (D.N.H. 2012).  Having failed to move to enjoin the foreclosure sale before launching such legal challenges, Calef (the home owner being foreclosed upon) was barred from doing so, after the foreclosure sale.  Fuller v. Fed. Nat'l Mortg. Ass'n, No. 218-2011-CV-00668, slip op. at 4-6 (N.H. Super. Ct. Oct 2, 2012)(Section 479:25, II barred challenge to foreclosure based on alleged invalidity of assignment where plaintiffs had notice of assignment well before sale); Baril v. JP  Morgan Chase Bank, N.A., No. 218-2010-CV-501, slip op. at 4-6 (N.H. Super. Ct. July 20, 2011)(similar); Fed Nat'l Mortg. Ass'n v. Goyal, No. 09-C-0543, 2011 WL 4403839 (N.H. Super. Ct. Feb 25, 2011)(similar).

Further, as the court previously ruled in LeDoux v. JP Morgan Chase, N.A., 2012 D.N.H. 194, 13-15, the borrower did not have standing to object to the transfer of a note on grounds that would merely render the transfer "voidable" as opposed to "void", such as a challenge to the mortgagee's pooling and servicing agreement.

In Calef, the plaintiff/pro se challenged the foreclosure sale of his home, after the foreclosure sale auction of his home occurred. The Court held that insofar as Calef's claims arise from alleged infirmities in the assignment of his mortgage to the foreclosing entity, New Hampshire state law preclude him for pursuing those claims because he failed to file a petition to enjoin the foreclosure sale prior the the sale occurring. Here, the owner of the home allegedly defaulted, and was sent a foreclosure notice by the mortgagee's counsel, the Harmon Law firm.  In the process, MERS assigned its interest in the mortgage to Citibank and copied Calef on the assignment.  Defendant/mortgagee characterized Calef's suit as a challenge to its pre-foreclosure conduct  (i.e. claims that the assignment of mortgage from MERS to Citibank was invalid) and claims related to post-foreclosure sale conduct (allegations that foreclosure deed and affidavit were  invalid). 

Further, the court found that even where a foreclosure deed and affidavit are not recorded at all, that does not affect the validity of the foreclosure sale as applicable to the mortgagor (meaning, the home owner).  "It follows that where the recorded deed and affidavit are deficient in some respect . . .  that, too, is a matter of no concern to the mortgagor." Calef, at p. 13. 

As such, summary judgment was granted to the foreclosing entity.

Recent Bankruptcy Decisions and news from NACBA: February 2013

News from the National Association for Consumer Bankruptcy Attorneys, for which I am a member:

Bankruptcy-Specific Exemptions Constitutional
The Bankruptcy Appellate Panel for the Tenth Circuit found that Kansas’s bankruptcy-only exemption scheme, under which a debtor in bankruptcy is permitted to exempt his Earned Income Tax Credit, is constitutional. Williamson v. Westby (In re Westby), No. 12-27 (B.A.P. 10th Cir. Feb. 4, 2013). The panel deferred to Kansas Bankruptcy Judge Karlin’s “extremely well-crafted” opinion in which she held as follows: “1) because the Kansas exemption statute is a state rather than federal enactment relating to bankruptcy, there is no Uniformity Clause violation; 2) because the Trustee demonstrated no express conflict between the Kansas exemption statute and the Bankruptcy Code, nor an implied conflict between the EIC exemption and the language and goals of the Bankruptcy Code, there is no Supremacy Clause violation; and 3) the Kansas exemption statute does not impermissibly reprioritize or preempt bankruptcy law with regard to the payment of bankruptcy claims.” In re Westby, 473 B.R. 392 (Bankr. D. Kan. 2012).

The Panel went on to address the impact of the recent case out of the Sixth Circuit, Richardson v. Schafer (In re Schafer), 689 F.3d 601 (6th Cir. 2012),petition for cert. denied, (Feb. 19, 2012) (No. 12-643). In that case, the Sixth Circuit found with respect to the Uniformity Clause that it is “not the outcome that determines the uniformity, but the uniform process by which creditors and debtors in a certain place are treated.” There was also no Supremacy Clause violation because section 522(b) of the Bankruptcy Code specifically authorizes use of state law over federal exemption law and the state statute actually furthers the federal bankruptcy goal of providing debtors with a fresh start.

NCBRC assisted with the debtor’s brief in this case.

The trustee filed a notice of appeal to the Tenth Circuit on February 15, 2013.

The constitutionality of Kansas’s bankruptcy-specific exemption is currently under consideration in the Kansas District Court in the cases of Nazar v. Hudson (In re Hudson), No. 12-1298, and In re Lea, No. 12-1297. NACBA has filed amicus briefs in those cases.

Amicus Brief
NACBA has filed an amicus brief in the en banc rehearing of Danielson v. Flores (In re Flores), No. 11-55452 (9th Cir.), arguing that a chapter 13 plan for an above-median debtor with negative disposable income need not extend for 60 months under the plain language of section 1325(b)(4) because there is no “projected disposable income.” On August 31, 2012, the Ninth Circuit stood by its previous decision in Maney v. Kagenveama, 541 F.3d 868 (9th Cir. 2008), to find that an above-median debtor with zero or negative disposable income does not need to confirm a 60 month plan under section 1325(b). Danielson v. Flores (In re Flores), No. 11-55452 (9th Cir. Aug. 31, 2012). The rehearing is scheduled for the week of March 18, 2013. The same issue is pending in the case of American Express v. Henderson, No. 11-35864 (9th Cir.). That panel has withdrawn submission of the case pending the decision in Flores. NACBA’s amicus brief was written by Norma Hammes.  

Supreme Court News
The Supreme Court denied the trustee’s petition for certiorari in the case of Richardson v. Schafer (In re Schafer), No. 12-643. The trustee sought to appeal the Sixth Circuit’s finding that Michigan’s bankruptcy-specific exemptions statute did not violate the U.S. Constitution’s Supremacy Clause or the uniformity requirement of the Bankruptcy Clause. NACBA submitted an amicus brief in the Sixth Circuit. 

Argued:
In re Bullard, No. 12-54 (B.A.P. 1st Cir.)Issue: Whether bankruptcy court erred in denying confirmation of “hybrid” plan under which lien would be bifurcated into an unsecured portion to be paid through the plan and a secured portion to be paid outside the plan and extending beyond the term of the plan.Argument date: January 28, 2013NACBA filed an amicus brief.

Scheduled for argument;

In re Ranta, No. 12-2017 (4th Cir.)

Issue: Whether social security benefits must be included in projected disposable income in chapter 13.

Argument date: March 20, 2013

NACBA filed an amicus brief in this case.

Thanks to Robin Miller of CBAR for assistance in keeping up with important bankruptcy decisions and appeals. www.cbar.pro

Recent Opinions from the First Circuit BAP - 2013

Appeal of reduction in Debtor's counsel's fees dismissed as moot:

RICHMOND, Appellant, v. SOVEREIGN BANK and DAVID M. NICKLESS, Chapter 7 Trustee, Appellees, BAP NO. MW 12-013 (Before Judges Lamoutte, Kornreich, and Cabán, Per Curiam)( 1^st Cir.  BAP 1/8/13).  Attorney Richmond, Debtor’s Ch. 11 counsel,  appeals from the bankruptcy court's order reducing his fees, which is dismissed as moot on appeal. Mootness will deprive the Bankruptcy Appellate Panel of jurisdiction to review a final order; and, because mootness is a threshold issue, the court may determine it sua sponte. See GE Capital Franchise Fin. Corp. v. Richardson (In re Newport Creamery, Inc.), 295 B.R. 408, 417 (B.A.P. 1st Cir. 2003). Mootness is present when no meaningful relief is available on appeal. See In re Cont’l Mortgage Investors, 578 F.2d 872, 877 (1st Cir. 1978). We are unable to fashion meaningful relief because no source exists for the payment of Richmond’s fees and expenses in any amount. This is so for two reasons: first, Richmond has acknowledged that the chapter 11 bankruptcy estate (Formatech) is without resources; and, second, there is no longer a possibility that the estate will be enhanced from the proceeds of the sale because no timely appeal was taken from our order dismissing the appeal of the bankruptcy court’s denial of Formatech’s § 506(c) motion.

For the full Opinion:

Click here: USBAP1 Opinion 12-013U

Creditors challenge to Debtor’s discharge properly dismissed as untimely where complaint filed after expiration of extended bar date;  Equitable tolling, and counsel’s alleged excusable neglect did not change the result; Ch. 7 Trustee’s extension did not apply to the individual creditor:

COSTA, Defendant-Appellee v. SULLIVAN, Plaintiff-Appellant, BAP NO. MB 12-032, (Before Judges Haines, Deasy, and Tester, Opinion by Tester) (1^st Cir. BAP 1/3/13).                                                                                                             
Appeal: Creditor, Gilbert C. Sullivan (“Sullivan”), appeals from a bankruptcy court order: (1) denying his untimely motion to amend his original § 523(c) complaint to add § 727 claims against the debtor, (“Costa”); (2) denying his untimely motion for an extension of time, nunc pro tunc, to file an adversary complaint under §§ 523(c) and 727(a); (3) granting Costa’s motion to dismiss; and (4) dismissing the adversary proceeding with prejudice.
Outcome: Affirmed.
                                                                                                                               Background:  Costa filed a petition for chapter 7 and on Schedule D, he listed Sullivan as the holder of a $400,000.00 undersecured claim. Although Costa’s schedules are not included as part of the record, we may take judicial notice of bankruptcy court proceedings. See Kowalski v. Gagne, 914 F.2d 299, 305 (1st Cir. 1990).  Sullivan filed timely motions to further extend the discharge complaint deadline, extending the deadline to September 15, 2011. Sullivan filed neither a complaint nor a motion to extend by the September 15, 2011 deadline.
Two weeks later, however, on October 4, 2011, he filed a belated, unsupported motion to extend the complaint deadline to November 22, 2011, to permit the continued investigation of his claims against Costa.  Costa objected the next day, asserting that Sullivan’s request was untimely. On October 21, 2011, without a hearing, the bankruptcy court entered an order granting the October 2011 Extension Motion and setting the complaint deadline for November 22, 2011. Costa did not seek reconsideration of the October 2011 Extension Order.  On November 21, 2011, Sullivan filed a multi-count complaint against Costa, seeking only a determination of dischargeability under § 523.  In his answer, Costa asserted as an affirmative defense that the complaint was time-barred. Thereafter, Sullivan filed a motion to amend the complaint to add his three § 727 counts, representing that his counsel, “through mistake and inadvertence, neglected to include a reference to § 727” in the original complaint, which Costa opposed emphasizing that the requested amendment was time-barred under Rules 4004(a) and 4007(c), and that the court allowed the October 2011 Extension Motion without specifically overruling his objection. Costa simultaneously filed a motion to dismiss, reiterating the timeliness issue and asking the court to dismiss the adversary proceeding with prejudice.   Sullivan did not oppose the motion to dismiss and instead, he filed another extension motion, this time seeking to enlarge the time for filing both his initial complaint and subsequent amended complaint, nunc pro tunc, to November 22, 2011.                                                                                            

Discussion:  Unpersuaded by Sullivan’s arguments, the bankruptcy court entered the Order which is the subject of this appeal. At the outset of its accompanying memorandum of decision, the court acknowledged that the October 2011 Extension Order “was entered by administrative error, the Court having been unaware of the Debtor’s timely filed objection to it.” Accordingly, the court concluded that the October 2011 Extension Order was “infirm from the standpoint of due process,” and treated it “as subject to reconsideration de novo in light of Debtor’s objection to that motion.” The court rejected Sullivan’s argument that his reliance on the October 2011 Extension Order precluded reconsideration, stating “I need not determine whether reliance should preclude reconsideration because there was no reliance that made a difference.”
The bankruptcy court observed that “Rules 4007(c) and 9006(b)(3) operate mechanically to preclude a court from granting an extension of time to file a complaint required by § 523(c) unless the plaintiff has complied with the requirement in Rule 4007(c) that a motion to extend be filed before the time has expired.” Noting that Sullivan failed to seek an extension until October 4, 2011, after the expiration of the September 14, 2011 deadline, the court concluded that the initial complaint was untimely under Rule 4007(c). Accordingly, the court granted the motion to dismiss, treating it as a motion for judgment under Fed. R. Civ. P. 12(c). It next denied the motion to amend, “for the same reasons it granted the motion to dismiss.”                                                                                                                                            

The bankruptcy court rejected Sullivan’s six arguments: First, it dismissed as meritless Sullivan’s excusable neglect argument, stating that excusable neglect does not apply to motions for enlargement of time under Rules 4004 and 4007; Second, the court disagreed with Sullivan’s contention that § 105 permitted it to override the express limitations on a court’s authority to extend set forth in Rules 4004(b), 4007(c), and 9006(b)(3). The court reasoned that “[§] 105(a) may not be invoked where the result of its application would be inconsistent with any other Code provision or it would alter other substantive rights set forth in the Code.” ; Third, the court rejected Sullivan’s waiver argument and his corresponding reliance on Kontrick v. Ryan, supra, because Costa raised the timeliness defense in his answer; Fourth, the court summarily rejected Sullivan’s reliance argument reiterating that “[t]here was no reliance that made a difference, the dispositive lapse having occurred before the entry of the erroneous order.”;  Fifth, the court was unpersuaded by Sullivan’s argument that the time limits in Rules 4004(b) and 4007(c) are subject to equitable tolling, concluding “[a]s a matter of law, the facts alleged by the Plaintiff do not constitute the extraordinary circumstances required to apply the doctrine of equitable tolling.”; and,  Sixth, the court rejected as baseless the argument that the extensions granted on behalf of the trustee should apply equally to Sullivan.             

For the full Opinion:

Click here: USBAP1 Opinion 12-032U

Bankruptcy Court significantly reduces Debtor's counsel's fee application, even though neither the Ch. 13 Trustee nor the Debtors objected to it:

 STONE, Appellant v. LITTLE [Ch. 13 Debtors] , Appellee, BAP NO. MW 12-029 (Before Judges Haines, Deasy, and Tester, Opinon by Haines) (1^st Cir. BAP 1/4/13)

Attorney Philip M. Stone appeals the bankruptcy court’s order limiting the fees to be allowed in connection with his representation of chapter 13.
OUTCOME: Affirmed.
The Littles hired Stone to represent them in bankruptcy. They agreed to pay him $2,500.00 for preparing and filing their petition, schedules, statements, and a chapter 13 plan. The parties agreed that additional services would be billed at Stone’s hourly rate. The Littles’ initial plan proposed payments of $35.00 for 60 months, providing a 1 percent dividend to unsecured creditors. Additional, unpaid legal fees of $900.00 were to be fully paid through the plan. The trustee objected, arguing that the Littles were not providing all of their projected disposable income to fund the plan as required by § 1325(b)(1)(B), and that they were not proceeding in good faith as required by §§ 1325(a)(3) and (7). The bottom line showed that, although together the Littles earned more than $111,000.00 per year, they were proposing to fund the plan at only $35.00 a month. The court sustained the objection, and ordered them to amend their plan. The Littles’ first amended plan set monthly payments at $860.00 for 60 months, providing a 44 percent dividend to unsecured creditors. But, this time, M & T Bank objected to the cramdown of its secured claim (an auto loan). Although the initial plan contained the same cramdown provision with respect to M & TBank’s claim, it did not object until the Littles filed their first amended plan. So, the Littles filed a second amended plan, resolving the M & T Bank objection, and calling for monthly payments of $860.00 for 60 months. The plan yielded a 47 percent dividend to unsecured creditors. In this incarnation, the plan also proposed to pay Stone’s legal fees, estimated to be $6,000.00, subject to application and allowance. The second amended plan was confirmed.

Stone filed his fee application, seeking fees and costs in the total amount of $9,102.10.  That sum included his pre-filing retainer of $2,500.00, over $4,000.00 for additional services, and more than $1,700.00 for preparing the fee application. After crediting payments of $3,474.00 (directly from the Littles and via the confirmed plan), he asked that the remaining balance of $5,628.10 be paid through the plan as an administrative expense. Neither the trustee nor any party-in-interest objected.  The court convened a total of three hearings to address Stone’s application. It noted that Stone’s fees were significantly higher than a typical fee for an uncomplicated chapter 13 case. Stone rejoined that the fees resulted from extensive communications with the trustee’s counsel regarding the Littles’ allowable expenses, and from preparation and filing of amended schedules and plans. The court characterized much of Stone’s work as “meritless.” In its view, had Stone appropriately limited the Littles’ expenses to those which above median income debtors could lawfully claim, then a plan calling for devotion of the proper projected disposable income could have been prosecuted to confirmation straightforwardly, at far more modest cost. Thus, the court allowed Stone’s fees in the reduced amount of $3,982.10 ($3,500.00 in fees; $482.10 in expenses). This appeal ensued.

DISCUSSION: The order before us finally adjudicated the attorneys’ fees and costs to be paid to Stone through the Littles’ confirmed plan. See Torres Lopez v. Consejo de Titulares del Condominio Carolina Court Apts. (In re Torres Lopez), 405 B.R. 24, 30-31 (B.A.P. 1st Cir. 2009). Thus, we have jurisdiction.Although the court did not consider Stone’s rates excessive, it determined that many of the hours he devoted to the case were unnecessary and reduced his fee accordingly. On the record before us, we cannot conclude that the bankruptcy court’s decision to reduce the fee award was an abuse of discretion.

For the full Opinion:

Click here: USBAP1 Opinion 12-029P

Debtor’s experience rate for unemployment purposes is an “interest” within the meaning of Section 363(f); and as such, Debtor may sell its business free and clear of it, which preempts the Massachusetts statute imposing the Debtor’s bad experience rating upon the Debtor’s successor (purchaser of Debtor’s business); defective service upon the DUA caused the bankruptcy court to rehear the matter as to the DUA but the rehearing did not change the ultimate result, which was affirmed on appeal:

MASSACHUSETTS DEPARTMENT OF UNEMPLOYMENT ASSISTANCE, Appellant, v. OPK BIOTECH, LLC, Appellee,  BAP NO. MB 12-042 (Before Haines, Deasy, and Tester, Opinion by Deasy) (1^st Cir. BAP 1/17/13). The Massachusetts Department of Unemployment Assistance (the “DUA”) appeals from the bankruptcy court order enforcing the sale of the debtor’s assets free and clear of any interest in said assets, including the DUA’s right to tax the purchaser at the debtor’s unemployment contribution rate. 

OUTCOME: AFFIRMED. The debtor filed chapter 11 with limited operations and only five employees. On the petition date, the Debtor filed a motion seeking approval of bid procedures and ultimately the sale of substantially all of its operating assets, free and clear of liens, claims, charges, security interests, restrictions, and encumbrances of any kind or nature, pursuant to § 363(f). The Debtor served the court approved notices and orders related to the auction and sale (the “Sale Notices”) on, inter alia, the attorney general for the Commonwealth of Massachusetts. The local rules for the United States Bankruptcy Court for the District of Massachusetts provide that: Whenever notice is required to be given to the Massachusetts Division of Unemployment Assistance, it shall be mailed to:Commonwealth of Massachusetts Department of Unemployment Assistance, Legal Department, 1st Floor, Attn. Chief counsel,19 Staniford Street, Boston, MA 02114.  The bankruptcy court entered an order approving the sale to OPK (the “Sale Order”). The Sale Order provided, among other things, that: (1) the transfer to OPK would be free and clear of all encumbrances, including any claims pursuant to any successor or successor-in-interest liability theory; (2) OPK would not be deemed a successor of the Debtor; and (3) OPK would not have any liability for any obligation of the Debtor or any claim against the Debtor related to the purchased assets by reason of the transfer of such assets. In the Sale Order, the bankruptcy court found that OPK would not have purchased the Debtor’s assets unless the transfer was “free and clear of all [e]ncumbrances of any kind or nature” including, but not limited to, successor liabilities for unemployment related claims including “claims that might arise under . . . state unemployment compensation laws or any other similar state laws.” Additionally, the Sale Order provided that, except as otherwise specifically set forth in the Asset Purchase Agreement, OPK neither assumed nor was obligated to pay or otherwise discharge any debts, obligations, or liabilities of the Debtor arising pursuant to the Debtor’s ownership or operation of its facilities before the purchase. Because the Debtor had laid off nearly all of its employees at the end of 2008, its experience rating was very high, which resulted in an unemployment contribution rate of 12.27 percent. 

The DUA Proceedings: Following the closing, OPK advised the DUA of its acquisition of the Debtor’s assets. The DUA, in turn, notified OPK that it was considered a “successor employer” within the meaning of the Massachusetts unemployment insurance statute, and that OPK’s contribution rate for 2009 and 2010 was 12.27 percent, and that as a successor employer, it was “liable for any past or future benefit charges attributable to the predecessor[’]s account.”  OPK filed an administrative appeal, challenging the DUA’s imposition of successor status on the grounds that OPK and the Debtor lacked substantially common ownership, interest, or control, which might give rise to a successor relationship under the Massachusetts unemployment insurance statute. The DUA refused to change its determination. Consequently, in March 2011, OPK moved the bankruptcy court to enforce the Sale Order (the “Motion to Enforce”), and the parties agreed to postpone further administrative proceedings pending the bankruptcy court’s disposition of the motion. 

The Bankruptcy Court Proceedings: In the Motion to Enforce, OPK sought an order: (1) declaring that the sale to OPK was free and clear of the Debtor’s experience rate and contribution rate as those terms are defined in state law; (2) requiring the DUA to refund to OPK overpayments resulting from the attribution of the Debtor’s experience rate; and (3) compelling the DUA to assign to OPK a 2.89 percent contribution rate as an employer newly subject to Mass. Gen. Laws ch. 151A, § 14, retroactive to the sale date and without regard to the Debtor’s pre-sale ratings.  In support of its request, OPK advanced five core arguments. First, OPK asserted that because the Debtor served the Sale Notices on the attorney general of the Commonwealth of Massachusetts, and neither the Commonwealth nor the DUA objected, the DUA irrevocably waived its right to object to the sale itself or the terms of the Sale Order. Second, OPK contended that § 363(m) protected the Sale Order from attack and reconsideration. Third, OPK asserted that, even assuming the Sale Order was subject to attack, the proper vehicle would have been a motion to reconsider or modify the order. Fourth, OPK argued that the bankruptcy court should enforce the Sale Order because at least four of the five disjunctive requirements for a sale free and clear under § 363(f) were satisfied. Lastly, OPK asserted that even if the DUA had timely objected to the Sale Notices, § 363(f) and the underlying policies of the Bankruptcy Code preempted the successor liability provision in the Commonwealth’s unemployment compensation statute. 

The Bankruptcy Court Decision:  The bankruptcy court issued its Memorandum of Decision, wherein it held that the Debtor’s experience and contribution rate were interests within the meaning of § 363. See In re PBBPC, Inc., 467 B.R. 1 (Bankr. D. Mass. 2012). In reaching this conclusion, the court determined as a preliminary matter that it had authority to revisit the Sale Order on two grounds. First, it found that the DUA did not receive proper notice of the sale. Accordingly, the court stated, “[a] judgment obtained without notice to a party is invalid against that party and therefore can have no preclusive effect as to that party.” Id. at 7. Second, the bankruptcy court concluded that it need not address OPK’s argument that the Sale Order was protected from collateral attack by § 363(m), reasoning as follows: This argument requires a difficult decision as to whether [ ] § 363(m), and the policy of finality it embodies, should override constitutional concerns about lack of notice. However, were the Court to find that the Sale Order is now subject to collateral attack and reconsider the merits in light of the objections and arguments the DUA now adduces, the Court would, for the reasons set forth below, conclude (i) that authority to sell pursuant to § 363(f) was properly granted and (ii) that the debtor’s experience rating is an “interest” within the meaning of § 363(f) that, in view of the authorization under § 363(f), the Commonwealth may not apply to OPK. Accordingly, the court may sustain the Sale Order on the merits and need not address the § 363(m) issue. The court’s analysis then proceeded to the requirements of § 363(f). It readily found the presence of one the five predicate conditions enumerated in § 363(f) for a sale free and clear, concluding that the DUA “could be compelled to accept a money satisfaction.”  Thus, the only issue that remained for the court to address was “whether the right of taxation that the DUA [was] charged with enforcing [was] an ‘interest’ in property of the estate within the meaning of § 363(f).” Id. For purposes of this analysis, the bankruptcy court “assume[d] without deciding that OPK [was] a successor employer within the meaning of” the applicable statute. Id. at 9. Acknowledging that an employer’s contribution rate was an “atypical” interest in property, the court nonetheless determined that there was still: [A] good reason to view this right as an interest in estate assets: it imposes a debtor’s experience rating on the buyer precisely because, and only because, the buyer purchased assets of the bankruptcy estate. 

By operation of the state statute, the debtor’s experience rating travels with the assets and encumbers their purchaser.  The relationship between the asset and the right in question is dispositive. The clear relationship between the DUA’s right to tax according to the debtor’s experience rating and the asset transfer on which that right is predicated makes the DUA’s right an interest within the meaning of § 363(f). Section 363(f) therefore applies to the DUA’s interest. As OPK argues and the DUA does not dispute, where § 363(f) does apply, it preempts any state law to the contrary. The [S]ale [O]rder thus preempts the application of successor status to OPK under [Mass. Gen. Laws. ch.] 151A, § 14. Id. at 10.  Accordingly, on July 2, 2012, the court entered the Order, which provided: For the reasons set forth in the Court’s earlier memorandum of decision [#444] on OPK’s Motion to Enforce Order Authorizing Sale [#403], the Court hereby (i) declares that the sale to OPK pursuant to the Sale Order was free and clear of the Debtor’s experience rate and contribution rate as those terms are defined in Mass. Gen. Laws c[h]. 151A, § 14, and (ii) orders the DUA to refund to OPK overpayments attributable to its attribution to OPK of the Debtor’s experience rate. The Court further hereby allows the Motion of OPK to Approve Stipulation [#444] and accordingly now approves the stipulation, which stipulation quantifies the refund required by this order and specifies the manner in which the refund has been and is to be effected. This appeal followed.  THREE 

ISSUES RAISED ON APPEAL AND ONE DECIDED: (1) whether the seller’s experience rate is an interest within the meaning of § 363(f); and (2) if so, does § 363(f) preempt Mass. Gen. Laws ch. 151A, § 14(n). However, the DUA did not brief the second issue and, therefore, has waived it. See Eakin v. Goffe, Inc. (In re 110 Beaver Street P’ship), 355 Fed. Appx. 432, 437 (1st Cir. 2009) (“An appellant waives any issue which it does not adequately raise in its initial brief.”). Therefore, the sole issue on appeal is whether the DUA’s right to tax OPK based on the Debtor’s high experience rating is an interest in property within the meaning of § 363(f). The parties do not dispute that at least one of the statutory conditions for approval of a sale free and clear of an interest in property is satisfied.  We conclude that the more expansive reading of the term “any interest” advanced by the Seventh, Fourth, Third, and Second Circuits in the cases cited is more consistent with the language of the Bankruptcy Code and the policy expressed in § 363. We therefore conclude that the term “any interest” as used in § 363(f) is sufficiently elastic to include the Debtor’s experience rate. Indeed, the record reflects that the transfer of an employer’s contribution rate to a successor asset purchaser is really an attempt to recover the money that the predecessor employer would have paid if it had continued in business.

For the full Opinion:

Click here: USBAP1 Opinion 12-042P