Justia Bankruptcy Opinion Summaries

The First Circuit reversed the order of the district court ruling that the automatic stay provision of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) did not apply to proceedings to determine the amount of federal court-ordered payments that the Commonwealth owed to several federally qualified health centers (FQHCs) per a 2010 injunction, holding that the automatic stay applied in this case.In 2003, several FQHCs sought to enjoin the Secretary of the Department of Health of Puerto Rico from failing to reimburse them for their reasonable costs of providing services to Medicaid patients. In 2018, the Commonwealth filed a motion notifying the district court that the Commonwealth had filed for bankruptcy under Title III of PROMESA and, therefore, the litigation was subject to the automatic stay. The district court ruled that the automatic stay did not apply. The First Circuit reversed, holding that certain provisions of PROMESA did not preclude the automatic stay’s application in this case. View "Migrant Health Center, Inc. v. Commonwealth of Puerto Rico" on Justia Law

At issue was whether 11 U.S.C. 362(c)(3)(A) terminates the automatic stay as to actions against property of the bankruptcy estate.Maine’s Bureau of Revenue Services (MRS) had a claim for a tax debt owed by Leland Smith, a repeat Chapter 13 bankruptcy filer. At issue int his appeal was the scope of the termination of the Bankruptcy Code’s automatic stay for repeat filers like Smith who file a second petition for bankruptcy within a year of the dismissal of a prior bankruptcy case. Thirty days after the filing of his bankruptcy petition, some part of the stay had terminated under section 362(c)(3)(A). Smith argued that the stay only terminated as to actions against the debtor and the debtor’s property, not as to actions against the property of the bankruptcy estate. The bankruptcy court ruled that the automatic stay had terminated in full, including as to property of the estate, and the district court affirmed. The First Circuit affirmed, holding that section 362(c)(3)(A) terminates the entire stay thirty days after the filing of a second petition. View "Smith v. State of Maine Bureau of Revenue Services" on Justia Law

At issue in this bankruptcy case was whether a defaulting subcontractor who has no contractual right to compensation is nonetheless entitled to an equitable recovery if the general contractor has benefited at the subcontractor’s expense.Insite, a bankrupt subcontractor, filed an adversary proceeding against Walsh, a general contractor, in bankruptcy court claiming that Walsh improperly withheld payments belonging to its bankruptcy estate. The bankruptcy court found the doctrine announced in Pearlman v. Reliance Insurance Co., 371 U.S. 132, 141-42 (1962), prevented Insite from gaining a property interest in the funds withheld by Walsh. The district court affirmed. The First Circuit vacated the judgment below and remanded, holding (1) the Pearlman doctrine did not address the primary issue in this case; and (2) while Insite was not due funds under its contract with Walsh, the bankruptcy and district courts must consider whether Walsh was benefited by Insite’s post-default performance in such a way that Insite had an equitable claim under Puerto Rico law. View "Insite Corp. Inc. v. Walsh Construction Co. Puerto Rico" on Justia Law

In this consolidated appeal from adversary proceedings challenging an alleged diversion of funds to which Peaje Investments LLC (Peaje) claimed it was entitled, the First Circuit held that Peaje did not hold a statutory lien on certain toll revenues of the Puerto Rico Highways and Transportation Authority (Authority).The Authority and the Commonwealth of Puerto Rico commenced bankruptcy cases under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act, 48 U.S.C. 2101-2241. Peaje, the beneficial owner of $65 million of uninsured bonds issued by the Authority, instituted adversary proceedings alleging that its bonds were secured by a lien on certain Authority toll revenues and that the Authority and the Commonwealth of Puerto Rico were diverting funds to which Peaje was entitled under the lien and using them for purposes other than paying the bonds. The First Circuit affirmed the Title III court’s primary grounds for its order denying Peaje’s request for a preliminary injunction and relief from the stay and otherwise vacated and remanded the matter, holding (1) Peaje did not hold a statutory lien on Authority toll revenues; and (2) now that it is clear that Peaje has no statutory lien, the district court’s alternative reasons for denying relief should be reconsidered de novo on an updated record. View "Peaje Investments LLC v. Puerto Rico Highways & Transportation Authority" on Justia Law

The First Circuit vacated the district court’s order denying the request for relief from a stay of actions against PREPA sought by holders of revenue bonds issued by PREPA (the bondholders), holding that the district court erred in concluding that the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) sections 305 and 306, 48 U.S.C. 2165, 2166, precluded it from granting such relief.PREPA filed for bankruptcy under Title III of PROMESA, which triggered an automatic stay of most actions by creditors against PREPA. The bondholders, who accused PREPA of breaching a promise to seek a rate increase sufficient to cover debt payments, of failing to collect on customer accounts, and of mismanaging operations, asked for relief from the automatic stay in order to file suit to have a receiver appointed to manage PREPA and seek a rate increase sufficient to cover debt servicing. The Title III court denied the bondholders’ request for relief from the automatic stay. The First Circuit vacated the court’s order and remanded the matter for further proceedings, holding (1) the court erred in concluding that PROMESA sections 305 and 306 prohibited it from granting relief; and (2) the record was inadequate to find support upon which to rest the Title III court’s finding that “cause” did not exist under 11 U.S.C. 362(d)(1) to lift the stay. View "Puerto Rico Electric Power Authority (PREPA) v. Ad Hoc Group of PREPA Bondholders" on Justia Law

The First Circuit reversed the judgment of the bankruptcy court allowing The Patriot Group, LLC to amend its pleadings in its adversary complaint requesting denial of the discharge in bankruptcy of Steven Fustolo’s debt and denying Fustolo’s discharge pursuant to the newly added claim, holding that the allowance of this belated amendment failed to satisfy the prescripts of due process underlying Fed. R. Civ. P. 15(b)(2) and was therefore an abuse of discretion. Specifically, the Court held that Appellant did not receive adequate notice of an unpleaded claim and did not provide his implied consent. Therefore, the bankruptcy court’s order must be reversed and the case remanded for further proceedings. View "Fustolo v. Patriot Group LLC" on Justia Law

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

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

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

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