Articles Posted in Bankruptcy

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The First Circuit affirmed the decision of the bankruptcy court dismissing an involuntary bankruptcy petition filed by one bank and joined by another against Defendant, a licensed plastic surgeon, holding that dismissal of the involuntary petition was proper because the Banks failed to meet the requirement that there be at least three petitioning creditors under 11 U.S.C. 303(b)(1). Under section 303(b), fewer than three petitioning creditors cannot force a debtor into bankruptcy unless the debtor has fewer than twelve creditors in total. The bankruptcy court granted Defendant's motion for summary judgment, concluding that Defendant had fifteen qualified creditors at the time the involuntary petition was filed and that the court did not have the equitable power to override the provisions of section 303(b)(1). The First Circuit affirmed, holding that the bankruptcy court did not err by (1) not placing on Defendant the burden of proving that he had twelve or more eligible creditors; (2) not finding that the Banks presented evidence sufficient to show that Defendant did not have twelve or more eligible creditors; and (3) not employing equitable discretion to allow the petition. View "Banco Popular de Puerto Rico v. Reyes-Colon" on Justia Law

Posted in: Bankruptcy

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The First Circuit affirmed the decision of the district court dismissing the complaint brought by the plan administrator of R&G Financial Corporation (Administrator) alleging that negligence and breach of fiduciary duties owed to R&G Financial (the Holding Company) caused the failure of R-G Premier Bank of Puerto Rico (the Bank) and the Holding Company's resultant loss of its investment in the Bank, holding that the complaint must be dismissed because the claims the Administrator asserted for the Holding Company were the Federal Deposit Insurance Corporation's (FDIC) under 12 U.S.C. 1821(d)(2)(A). R&G Financial entered Chapter 11 bankruptcy after the Bank, its primary subsidiary, failed. Previously, Puerto Rican regulators had closed the Bank and named the FDIC as the Bank's receiver. After the Bank failed, the Administrator filed this suit against six of the Holding Company's former directors and officers and their insurer. The FDIC intervened. The district court dismissed the complaint. The First Circuit affirmed on different grounds, holding that, under section 1821(d)(2)(A), the FDIC succeeded to the Administrator's claims. View "Zucker v. Rodriguez" on Justia Law

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The First Circuit affirmed the decision of the district court dismissing Appellants' amended complaint in an adversary proceeding arising within the debt adjustment proceeding that the Financial Oversight and Management Board (Board) commenced on behalf of the Puerto Rico Highway and Transportation Authority (PRHTA) under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), 48 U.S.C. 2161-2177, holding that Appellants were not entitled to the relief they sought. Appellants were financial guarantee insurers that had insured bonds from PRHTA. After the enactment of PROMESA, the Board certified a financial plan by which the PRHTA pledged special revenues to be diverted into the general revenues of Puerto Rico. Payments to the PRHTA bondholders continued, but after the PRHTA defaulted on a scheduled bond payment, the funds ceased to be distributed. Appellants initiated adversary proceedings claiming, among other things, that sections 922(d) and 928 of the Bankruptcy Code required PRHTA to remit payment of special revenues to bondholders during the pendency of the Title III proceedings. The district court dismissed the complaint. The First Circuit affirmed, holding that sections 922(d) and 928(a) permit, but do not require, continued payment during the pendency of the bankruptcy proceedings, and therefore, the district court properly dismissed the complaint. View "Assured Guaranty Corp. v. Commonwealth of Puerto Rico" on Justia Law

Posted in: Bankruptcy

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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

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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

Posted in: Bankruptcy

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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

Posted in: Bankruptcy, Contracts

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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

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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

Posted in: Bankruptcy

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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

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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

Posted in: Bankruptcy