Recent First Circuit & BAP Cases on Bankruptcy

Construction debt is not discharged under 11 U.S.C. Section 523(a)(2)(A):

Click here: USCA1 Opinion

SHARFARZ, Appellant, v. GOGUEN [Debtor], Appellee, 691 F.3d 62 (1st Cir. 2012) (Before Justices Boudin, Souter, Thompson, Opinion by Thompson). “What happened in this bankruptcy case is probably every homeowner's worst nightmare."   HELD: First Circuit vacated the BAP's judgment and remanded to that tribunal with directions that it, in turn, remand the case to the bankruptcy court for further proceedings consistent with this opinion. SUMMARY:  The First Circuit agreed with the Bankruptcy Court that the construction debt at issue was not discharged per Section 523(a)(2)(A). While the BAP found that creditor failed to satisfy the cause-in-fact rule that the chapter 7 debtor's misrepresentations induced him to enter into the construction contract, the First Circuit disagreed and found the focus to be broader, examining the transaction.  Examining the transaction, the First Circuit found that the creditor satisfied its proof as to cause-in-fact and legal cause. Thus, the creditor showed that the debtor's lies led to a loss that might reasonably have been expected to result from the reliance i.e.as the debtor (pre-petition) strung the creditor along with lies about the permit application relevant to the projected construction project, the debtor could have reasonably foreseen that his deceit would delay the project, which would lead to the project pouring concrete in cold weather, which in turn would lead to the concrete foundation cracking.  So, to put the point in "Restatement" terms, creditor's reliance on debtor's misrepresentations resulted in a " loss" that could " reasonably" have been " expected" to occur " from the reliance" — indeed the loss here was expected. Creditor prevails because he adequately proved causation and debtor did not bear his burden of showing an intervening or superseding cause. Consequently, the First Circuit reversed the BAP's decision which BAP decision reversed the bankruptcy court.  Finally, the amount not discharged will be determined upon remand to the bankruptcy court. 

Income tax refunds are property of the Ch. 13 bankruptcy estate and thus may be exempted; timing determines whether they are part of disposable income:
Click here: USBAP1 Opinion 11-074P

MATOS [Debtor], Appellant, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-074, (BAP 1^st Circuit Sept. 26, 2012) (Before Judges Boroff, Deasy, and Bailey)(Opinion by Deasy).  HELD: Bankruptcy Appellate Panel reversed the bankruptcy court's determination that the income tax refund at issue was not property of the estate. BAP found that the income tax refund was property of the chapter 13 bankruptcy estate and thus could be exempted on Schedule C.  As such, the Chapter 13 trustee's objection to the debtor's exemption in the refund is overruled.
For a similar ruling, See SANTIAGO, MORALES, Appellants, v. RIVERA, Chapter 13 Trustee, Appellee, BAP NO. PR 11-075 (BAP 1^st Circuit   September 26, 2012) (Before Boroff, Deasy, and Bailey, Opinion by Deasy). Click here: USBAP1 Opinion 11-075P

Collateral valuation date is flexible; post-petition interest paid to oversecured creditor at default rate and compounded:

Click here: USBAP1 Opinion 11-079P

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant / Cross-Appellee, v. CITY OF BOSTON, Appellee, and SW BOSTON HOTEL VENTURE, LLC, et al., Appellees / Cross-Appellants [Debtors],  BAP NOS. MB 11-079, (BAP 1^st Circuit October 1, 2012)(Before Haines, Deasy, and Tester, Opinion by Deasy).   HELD: BAP AFFIRMS the Default Rate Calculation, REVERSES the 506(b) Order and the Prudential Claim Order, and REMANDS. SUMMARY:  The BAP held that they will follow the "flexible" approach rather than a fixed date for valuation of collateral for purposes of Section 506(b), and in so doing the creditor's debt was determined to be oversecured and the creditor entitled to be paid then post-petition interest, said interest paid at the contract's default rate and compounded. 

Where valuation impacted plan, debtor given a chance to amend: 
 Click here: USBAP1 Opinion 11-087U  

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

Creditor may move forward on discharge complaint, not time-barred:
 Click here: USBAP1 Opinion 11-048P              

GONSALVES, Plaintiff-Appellant, v. BELICE [Debtor], Defendant, Appellee, BAP NO. MB 11-048, (BAP 1^st Cir. October 15, 2012) (Before Lamoutte, Haines, and Deasy, Opinion by Haines) [No brief filed for Appellee, Appellant Pro Se].  Gonsalves, a pro se creditor, appealed: (1) the order granting the motion of the debtor to dismiss Gonsalves’ adversary complaint; and (2) the order denying Gonsalves’ motion for relief from judgment.  As the BAP concluded that the dismissal was not only beyond the scope of their prior remand but was also legal error, they VACATED the orders and REMANDED the matter for further proceedings consistent with this opinion.  In a prior opinion, the BAP found that the debtor's notice to the creditor was so defective as to defeat notice of the bankruptcy case or discharge bar date, allowing then the creditor to go forward on one of his two counts challenging the dischargability of his debt, with the Section 727 count being time barred but the §523(a) count not. Thus, the bankruptcy court's dismissal of the §523(a) count exceeded the scope of the prior remand i.e. BAP had concluded in its prior opinion that the creditor's complaint presented a plausible case for relief under §523(a)(3). Therefore, it was error for the bankruptcy court  to dismiss this claim on the grounds that he failed to state a claim upon which relief can be granted.  On remand, debtor again sought dismissal under Rule 12(b)(6), this time based on his argument that creditor had failed to file the §523(a)(3) count within one year of his discharge, despite having received notice a month prior to that anniversary. Debtor erroneously contended that the one year limitation set by §727(e) for discharge revocation actions applied to the creditor's §523(a)(3) claim. Creditor argued that because the BAP's remand confined the bankruptcy court to consideration of the merits of his §523(a)(3) count, it was error to expand its scope to include a request for dismissal based on timeliness. He contends that it was also error to dismiss his complaint for failure to file a response to the dismissal motion when he had, in fact, filed an objection. He lastly reiterates that his complaint was not time-barred. The BAP agreed. 

Construction debt was discharged, no fraudulent intent: 

Click here: USBAP1 Opinion 12-017U

BELLAS PAVERS, LLC, Plaintiff-Appellant, v. STEWART [Debtor], Defendant-Appellee, BAP NO. MB 12-017; (Before Lamoutte, Kornreich, and Cabán, Opinion by Cabán)(BAP 1^st Circuit  October 18, 2012). This case arises out of an adversary proceeding brought by Bellas Pavers, LLC seeking to except from discharge a debt owed by Stewart for masonry services. The bankruptcy court conducted a trial, and at the close of Bellas’ case, Stewart moved for a judgment on partial findings pursuant to Fed. R. Civ. P. 52(c), which the Court granted and entered judgment in favor of Stewart. Thereafter, Bellas filed a motion pursuant to Fed. R. Civ. P. 59(a) requesting a new trial, or in the alternative, that the bankruptcy court reopen the original trial, enter new findings of facts and conclusions of law, find in Bellas’ favor on all counts, and enter a judgment of non-dischargeability. The bankruptcy court denied the motion for a new trial, and Bellas appealed. Controversy centers on the construction of a stone patio and retaining wall where the debtor failed to pay a sub-contractor even though the debtor was paid for the job. The bankruptcy court conducted a trial. After plaintiff put on two witnesses, Stewart moved for a judgment on partial findings pursuant to Rule 52(c), asserting three grounds: (1) lack of personal liability for Premier’s actions (the agreement was between Bellas and Premier, not Stewart); (2) lack of evidence that Stewart had fraudulent intent when he entered into the agreement with Bellas on Premier’s behalf; and (3) lack of evidence that Bellas had reasonably relied on Stewart’s representations. As to the question of fraudulent intent, the bankruptcy court stated as follows: It’s perfectly consistent [with] the evidence that Mr. Stewart did, in fact, intend when he entered into the contract with Bellas on behalf of Premier to have Bella[s] paid. I have nothing in my record that indicates that that was a lie. . . I don’t know what happened that Premier/Stewart didn’t pay Bellas Pavers. Maybe they just ran out of money. I don’t know what they did with the money, but that doesn’t prove that it should be a debt [sic] will be – which would be nondischargeable in bankruptcy.”  Given these facts, the bankruptcy court granted Stewart’s motion under Rule 52(c), and entered judgment in his favor. Thus, based upon the record, we conclude that the bankruptcy court did not err by not inferring fraudulent intent from the totality of the circumstances. HELD: AFFIRMED. 
MOTION FOR COSTS AND FEES DENIED: Stewart filed a separate motion under Bankruptcy Rule 8020 seeking damages, including attorneys’ fees and costs, incurred in defending this appeal.  Bellas objects to the motion. Bankruptcy Rule 8020 provides: If a . . . bankruptcy appellate panel determines that an appeal . . . is frivolous, it may, after a separately filed motion . . . and reasonable opportunity to respond, award just damages and single or double costs to the appellee.  While there is no formula for determining whether an appeal is frivolous, courts generally consider several factors, including: the appellant’s bad faith, whether the argument presented on appeal is meritless in toto, and whether only part of the argument is frivolous. A court may consider whether the appellant’s argument addresses the issues on appeal, fails to cite any authority, cites inapplicable authority, makes unsubstantiated factual assertions, asserts bare legal conclusions, or misrepresents the record. However, “[Bankruptcy] Rule 8020 is far from a strict liability model. More than just a losing argument is necessary to support a conclusion that an appeal is frivolous.  An appeal is frivolous if the result is obvious or the arguments supporting the appeal are wholly without merit. Such is not the case herein.