Articles Posted in US Court of Appeals for the First Circuit

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An employee of the Internal Revenue Service (IRS) “willfully violates” an order from the bankruptcy court discharging the debts of a debtor-taxpayer, as that term is used in 26 U.S.C. 7433(e), when the employee knows of the discharge order and takes an intentional action that violates the order. William Murphy filed a Chapter 7 petition in the bankruptcy court seeking primarily to discharge his tax obligations. The bankruptcy court granted Murphy a discharge. Murphy later successfully filed an adversarial proceeding seeking a declaration that his relevant tax obligations had been discharged. Murphy then filed a complaint against the IRS alleging that one of its employees willfully violated the bankruptcy court’s discharge order by issuing levies against the insurance companies with which he did business in an attempt to collect on his discharged tax obligations. The bankruptcy court granted summary judgment for Murphy. The parties eventually entered into a settlement agreement whereby the IRS accepted the summary judgment ruling. After final judgment was entered against the IRS, the IRS appealed. The First Circuit affirmed, holding that the IRS’s reasonable and good faith belief that the discharge injunction did not apply to its collection efforts was not relevant to determining whether it “willfully violate[d]” the discharge order. View "Internal Revenue Service v. Murphy" on Justia Law

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At issue was whether the proceeds of a multi-million-dollar sale of certain railroad lines constituted property of the bankruptcy estate. Debtor purchased the assets of several United States and Canadian railways. Debtor obtained loans from the Federal Railroad Administration (FRA) and Railway and received funds from Investors. Debtor later proposed to sell 233 miles of track to the State of Maine. To make this possible, Debtor and the FRA amended the existing loan agreement so that the FRA provided a limited waiver of its senior lien over the lines in exchange for a replacement lien on certain of Debtor’s property in Canada. The limited waiver was conditioned on Debtor’s agreement that, upon closing of the sale, Debtor was to pay the FRA, Investors, and Railway certain sums in a “waterfall of disbursements.” After Maine purchased the lines, Debtor distributed the proceeds in accordance with the waterfall provision of the amendment. Debtor subsequently filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code. The Trustee instituted an adversary proceeding against Railway seeking to avoid its waterfall disbursement as constructively fraudulent under section 5(b) of Maine’s Uniform Fraudulent Transfer Act. The bankruptcy court dismissed the complaint with prejudice for failure to state an actionable claim. The First Circuit affirmed, holding that the waterfall disbursement to Railway did not consist of property of Debtor’s estate because this was a case in which a senior lien holder imposed conditions that precluded Debtor from exercising effective control over the sale proceeds. View "Keach v. Wheeling & Lake Erie Railway Co." on Justia Law

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The First Circuit affirmed the sale of Debtor’s remaining finished goods inventory to Schleicher and Stebbins Hotels LLC (S&S) after Debtor auctioned of its assets pursuant to section 363 of the Bankruptcy Code. Debtor and S&S completed the sale with the bankruptcy court’s approval. Mission Product Holdings, Inc. (Mission), an unsuccessful bidder at the auction, appealed, challenged the inventory sale. The bankruptcy court ultimately approved the sale of the inventory to S&S. The Bankruptcy Appellate Panel (BAP) concluded that the bankruptcy court applied the correct legal standards and that S&S was a good faith purchaser. The First Circuit affirmed, holding (1) S&S was a good faith purchaser entitled to the protection of section 363(m); and (2) Mission’s remaining challenges to the sale order were therefore rendered statutorily moot. View "Mission Product Holdings, Inc. v. Old Cold, LLC" on Justia Law

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The First Circuit affirmed the district court’s judgment affirming the bankruptcy court’s ruling that the largely debt-financed purchase of a family-owned leather manufacturer was not a fraudulent conveyance and was not a violation of the fiduciary duties of the company’s directors. The trustee of a trust established to benefit the creditors of several related insolvent entities filed a complaint alleging that the transaction at issue was a fraudulent conveyance and that the company’s directors were in breach of their fiduciary duties by approving it. The bankruptcy court ruled in the defendants’ favor on every count. The district court affirmed, holding that the bankruptcy court’s factual determinations were not clearly erroneous, and the bankruptcy court found sufficient facts to support its conclusions. View "Development Specialists, Inc. v. Kaplan" on Justia Law

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The district court did not abuse its discretion in denying Appellant’s motion for extension of time to file notice of appeal pursuant to Bankruptcy Rule 8002(d)(1)(B) for failing to show excusable neglect. Appellant filed her motion one business day late as a result of her attorney’s preoccupation with his second job as a church’s music director. The district court concluded that counsel’s explanation for the delay amounted to mere inadvertence and did not constitute excusable neglect. The First Circuit affirmed, holding that the district court did not abuse its discretion in finding that Appellant’s counsel’s inadvertence did not constitute excusable neglect and that Appellant was bound by counsel's carelessness. View "Sheedy v. Bankowski" on Justia Law

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The First Circuit affirmed an order of the bankruptcy court denying Appellant Chapter 7 discharge on the grounds that she made material, knowing, and fraudulent false oaths in the course of her bankruptcy proceedings. The bankruptcy judge concluded that the failure of Appellant, an attorney, to disclose two lawsuits to which she was a party indicated that she had not filed her bankruptcy case in good faith. The United States Bankruptcy Appellate Panel for the First Circuit affirmed. Thereafter, the bankruptcy judge denied Appellant’s discharge, concluding that she had acted with reckless indifference to the truth by failing to disclose the two lawsuits in a timely manner. The district court affirmed. The First Circuit also affirmed, holding that the bankruptcy judge did not clearly err in finding that Appellant had made false statements with reckless indifference to the truth. View "Zizza v. Harrington" on Justia Law

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The First Circuit reversed the district court’s order denying Appellant’s motion to intervene in an adversary proceeding arising within the Commonwealth’s debt adjustment case under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), 48 U.S.C. 2161-2177, holding that 11 U.S.C. 1109(b) provides an “unconditional right to intervene” within the meaning of Fed. R. Civ. P. 24(a)(1). Appellant, the Official Committee of Unsecured Creditors (UCC), intervened in an adversary proceeding initiated by Plaintiffs within a larger case brought by the Financial Oversight and Management Board on behalf of the Commonwealth. The Board had commenced quasi-bankruptcy proceedings to restructure the Commonwealth’s debt under a part of PROMESA referred to as Title III. The district court denied the UCC’s motion to intervene with respect both to intervention as of right and to permissive intervention. The First Circuit reversed, holding that section 1109(b) provided the UCC with an unconditional right to intervene in the adversary proceeding. View "Assured Guaranty Corp. v. Official Committee of Unsecured Creditors" on Justia Law

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A creditor appealed a bankruptcy court’s decision to deny a creditor’s motion to appoint a trustee for the bankruptcy estate to replace the debtor in possession of that estate. The Bankruptcy Appellate Panel affirmed the bankruptcy court’s ruling. The First Circuit also affirmed, holding (1) the bankruptcy court did not err in determining that appointment of a trustee was not justified under 11 U.S.C. 1104(a)(1); and (2) the bankruptcy court did not err in finding that the appointment of a trustee would not be in the interests of creditors - the standard for appointment of a trustee under 11 U.S.C. 1104(a)(2). View "United Surety & Indemnity Co. v. Lopez-Munoz" on Justia Law

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Debtors filed voluntary petitions under chapter 11 of the Bankruptcy Code and a motion seeking bankruptcy court approval of an asset purchase agreement (APA), whereby they agreed to seek substantially all of their assets to Buyer. The bankruptcy court approved the APA through a sale order and confirmed Debtors’ proposed plan of reorganization. Appellants, senior executives of Debtor, were then informed that their employment was terminated the day the sale closed. The bankruptcy court found Buyer liable to Appellants under the APA for their severance pay. The district court vacated the judgment against Buyer, finding that Appellants’ claims against Buyer fell outside the bankruptcy court’s statutorily granted jurisdiction. The First Circuit affirmed, holding that the bankruptcy court had no jurisdiction over Appellants’ claims for severance pay from Buyer because the claims were not proceedings which “arise in” the chapter 11 bankruptcy such that they fell within the grant of jurisdiction contained in 28 U.S.C. 1334. View "Quincy Medical Center v. Gupta" on Justia Law