As of the Petition Date, the Debtors owned and operated the largest private physician-owned for-profit healthcare network in the United States. Headquartered in Dallas, Texas, the Debtors’ operations on the Petition Date included 31 hospitals across eight states, approximately 400 facility locations, 4,500 primary and specialty care physicians, 3,600 staffed beds, and a company-wide workforce of nearly 30,000 employees that provide care to more than two million patients annually.

Amann Burnett has successfully defended a so-called Preference Target Letter by explaining that its client has valid defenses (ordinary course, contemporaneous exchange for new value, subsequent value) defenses.  The Trustee has “gone away”, hopefully for good as the applicable statute of limitations is fast approaching.  A “preference” is defined by Section 547 of Title 11 of the United States Code (the “Bankruptcy Code”).

The case includes the following list of debtors:

The post AMANN BURNETT defends Preference Claim……Successfully So Far-STEWARD HEALTHCARE SYSTEM, LLC, Bankr. S.D., Texas appeared first on Amann Burnett Law.

Click on the link above to read the Memorandum Decision.  Amann Burnett, PLLC specializes in Bankruptcy Litigation and Chapter 11 matters for creditors and debtors.

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The term “zombie mortgage” has recently gained notoriety as long-silent mortgage servicers have surfaced to attempt to collect old (or even ancient) second mortgages, many of which date back to the recession of the late 2000s. With many of the thousands of these zombie mortgages, borrowers have not received statements or any correspondence for years during which time interest has continued to accrue. A second mortgage that may have been $25,000 in 2009 might have a balance two or three times that amount some 15 years later in 2024, and where residential properties may have had little to no equity in the 2000s or early 2010s, those same properties have increased significantly in value – the perfect scenario for a second mortgage holder to foreclose.

If this sounds unfair or even illegal, it might be.

The Massachusetts Attorney General recently announced an unprecedented settlement with a mortgage servicer that was attempting to collect loans secured by zombie mortgages. The Attorney General alleged that the servicer, Franklin Credit Management Corporation, had failed to comply with numerous state and federal mortgage and debt collection regulations, all in violation of the Massachusetts Consumer Protection Act (G.L. c. 93A). According to the filings, Franklin Credit is prohibited from collecting anything from the 518 accounts that it was servicing (totaling roughly $10,000,000) and is further prohibited from transferring or selling the loans. In short, the loans are uncollectable and the mortgages will be discharged.

This is promising news for others who may be experiencing something similar. Although this is still very much a developing area, there may be options available to attempt to address a zombie mortgage or a threatened foreclosure. If you are one of the thousands of borrowers who have been affected, contact us to discuss those options.

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Demona Freeman secured a loan to purchase her home, which was assigned to the Bank of New York Mellon (BNY Mellon) and serviced by Ocwen Loan Servicing, LLC. After falling behind on her mortgage payments, BNY Mellon initiated a foreclosure action. Freeman filed for bankruptcy and eventually cured her mortgage default through bankruptcy payments. Despite this, Ocwen inaccurately reported her loan as delinquent and began rejecting her monthly payments, leading BNY Mellon to file a second foreclosure action, which was later dismissed. Freeman sued Ocwen and BNY Mellon, alleging violations of the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA).

The United States District Court for the Southern District of Indiana dismissed Freeman’s FCRA claim and granted summary judgment against her, on her FDCPA claim, citing lack of standing.  Freeman appealed both rulings.  She argued that Ocwen failed to conduct a reasonable investigation after being notified by consumer reporting agencies (CRAs) of her dispute over the delinquent loan reporting.  She also claimed that Ocwen’s erroneous reporting and collection practices caused her various injuries.

The United States Court of Appeals for the Seventh Circuit reviewed the case.   The court affirmed the district court’s dismissal of the FCRA claim, finding that Freeman failed to specify which CRA she notified, thus not providing Ocwen fair notice of the claim.  The court also upheld the summary judgment on the FDCPA claim, concluding that Freeman lacked standing.  The court determined that Freeman did not provide sufficient evidence of concrete injuries, such as monetary harm or intangible injuries closely related to common law analogues like defamation or invasion of privacy.  Consequently, the court affirmed the district court’s rulings.

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In Mahabir v. Crocker, 235 N.E.3d 322 (Mass. App. Ct. 2024), the plaintiff and her spouse filed a Chapter 13 bankruptcy case in 2017, a few months after the plaintiff had been allegedly wrongfully terminated. The plaintiff did not disclose the potential claim against her former employer in the bankruptcy petition, but two years later filed suit against her former employer in Superior Court alleging sexual harassment and other torts. The defendant in the Superior Court case noticed the omission in the bankruptcy case and filed a motion for judgment on the pleadings, arguing that the plaintiff is judicially estopped from prosecuting her claim because of her failure to disclose the claim in the bankruptcy case. After the motion was served, but before it was filed, the plaintiff moved to amend her bankruptcy petition to include the claim as property of the bankruptcy estate, which was promptly allowed by the Bankruptcy Court, and also filed a motion to employ her state court attorney to prosecute the case on behalf of the bankruptcy estate. The plaintiff filed an opposition to the motion for judgment on the pleadings and noted, among other things, that the amendment had already been allowed. The Superior Court judge granted the defendant’s motion without a hearing, stating that the plaintiff had benefited from the nondisclosure, but without taking into consideration that the omission had been cured and that the plaintiff’s attorney had been employed to prosecute the case. The Appeals Court reversed.

Judicial estoppel stands for the proposition that a litigant who has taken a contrary position in a different proceeding is barred from taking a directly contradictory position in another proceeding. There is no formulaic application, and courts have recognized exceptions where the litigant had acted in good faith or had some legitimate reason rather than simply to gain an advantage.

The Appeals Court explained the rather complicated interplay between the two legal proceedings. In a Chapter 13 case, a debtor must use future income to fund a repayment plan to creditors. The amount that must be paid in order for a plan to be confirmed (approved) by the court depends, in part, on the value of the debtor’s assets and whether or to what extent those assets are exempt under either state law or the Bankruptcy Code. If a debtor’s assets are not exempt or are not fully exempt, the debtor must pay the equivalent value to his or her unsecured creditors over the term of the plan – effectively ‘buying back’ those non-exempt assets from the claims of creditors. The Appeals Court recognized that the non-disclosure of the claim could be prejudicial to creditors in the bankruptcy case, but that by disclosing the claim (albeit very late) and prosecuting the claim on behalf of the bankruptcy estate would potentially benefit all creditors. While admonishing the plaintiff for correcting the issue late and only after having been called out by the defendant, the Appeals Court was ultimately persuaded by the fact that the plaintiff had amended the bankruptcy petition while the case was still pending, during the repayment period, and before discharge had entered, and that the Bankruptcy Court had allowed the amendment. Although not specifically cited in the opinion, Federal Bankruptcy Rule 1009 states that a petition can be amended by a debtor “as a matter of course at any time before the case is closed.” Bankruptcy Courts usually permit amendments freely unless the amendment is requested in bad faith.

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While this appeal did not involve any novel issues, it did involve a smattering of bedrock trial topics such as standing, evidence (hearsay), claims in bankruptcy, evidentiary burdens of persuasion, default judgments, document admissibility and witness testimony.   The case also dealt with legal issues such as the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601, M.G.L. 93A, Excusable Neglect, Insurance placement, Declaratory Judgment and the trial court’s discretion concerning certain, case deadlines and trial procedures.

Appellant raises six arguments on appeal. She argues the Bankruptcy Court erred by: (1) failing to extend Appellant’s discovery deadline; (2) allowing Appellees’ witness to testify following a review of documents outside of court; (3) finding that Christiana had standing to enforce the Note against Appellant; (4) depriving her of a fair hearing on the merits based on certain statements made by the Bankruptcy Court during the trial; (5) finding that Appellant had not met her burden of proving that she had obtained homeowner’s insurance; and (6) failing to enter a declaratory judgment against the DCM and Urban under Count IV.

When a district court reviews a decision of a Bankruptcy Court, it applies a clearly erroneous standard to findings of fact, de novo review to conclusions of law, and abuse of discretion review to discretionary rulings.  See In re López-Muñoz, 983 F.3d 69,71 (1st Cir. 2020). “A [factual] finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” In re IDC Clambakes, Inc., 727 F.3d 58, 63–64 (1st Cir. 2003). Moreover, “[m]ixed questions of law and fact invoke a sliding standard of review,” whereby “[t]he more fact intensive the question, the more deferential the level of review . . . [and] the more law intensive the question, the less deferential the level of review.” Id. at 64.

Among other rulings in the case, the Court found that the testimony of the appellee’s witness, who was called by Amann & Burnett, was properly allowed and admissible, despite the appellant’s objection.  The standard of review applied to a bankruptcy court’s evidentiary rulings is abuse of discretion. Williams v. Drake, 146 F.3d 44, 47 (1st Cir. 1998). Under Federal Rule of Evidence 602, “[a] witness may testify to a matter only if evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter.” Fed. R. Evid. 602; see Fed. R. Bank. P. 9017 (stating that the Federal Rules of Evidence apply). Evidence that a witness has personal knowledge may come in the form of that witness’s own testimony. Id. “Evidence is inadmissible under Rule 602 ‘only if in the proper exercise of the trial court’s discretion it finds that the witness could not have actually perceived or observed that which he testified to.’” United States v. Neal, 36 F.3d 1190, 1206 (1st Cir. 1994) (quoting Hallquist v. Local 276, Plumbers & Pipefitters Union, 843 F.2d 18, 24 (1st Cir. 1988)).

Read the full decision by clicking on the link below and please do not hesitate to contact Amann Burnett, PLLC for any questions or issues you might have related to complex bankruptcy, commercial litigation, trials and Federal Court appeals.

In re Watkinson Decision on Appeal

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The term “avoid” is a bankruptcy term of art akin to “reverse” or “undo” in layman’s terms. Certain sections of the Bankruptcy Code permit a trustee or, in some circumstances, a debtor, to avoid transfers of money or property that occurred before the bankruptcy case was filed. A foreclosure auction is a transfer for bankruptcy purposes. Since at least the decision in In re Mularski, 565 B.R. 203 (Bankr. D. Mass. 2017), many Chapter 13 debtors have been successful in avoiding a foreclosure sale under specific sections of the Bankruptcy Code when the bankruptcy case is filed after the sale takes place, but before the foreclosure deed is recorded.

The legal mechanics to avoid of a pre-petition foreclosure are briefly described as follows.

Bankruptcy Code § 544(a)(3) states:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by— … (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

Bankruptcy Code § 522(h) states:

(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if— (1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and (2) the trustee does not attempt to avoid such transfer.

Put simply, these two statutes state that a bankruptcy debtor may avoid a pre-petition transfer if the trustee does not elect to do so, as long as the transfer was not perfected under state law prior to the bankruptcy case and there was no notice of the transfer to potential bona fide purchasers prior to the bankruptcy case (note that both perfection and notice must be lacking). The debtor must also comply with § 522(g)(1), which states that the transfer must not have been voluntary, was not concealed, and the property that was transferred would have been part of the bankruptcy estate when the case was filed and exempt from claims of creditors if the transfer had not occurred.

In this case, Tran v. Citizens Bank, the lender conducted a mortgage foreclosure sale of the debtor’s home on August 16, 2022. The debtor filed a Chapter 13 bankruptcy case 28 days later on September 13, 2022 and initiated an adversary proceeding to avoid the foreclosure sale. Before the bankruptcy case was filed, however, the lender recorded a foreclosure deed and other documents required by Massachusetts foreclosure law, including an Affidavit of Sale. The deed apparently lacked proper notarization and the debtor argued that such a defect rendered the deed ineffective to perfect the transfer and convey the property to the buyer, and in the absence of a proper deed, the recording of the Affidavit of Sale alone was insufficient to give constructive notice to third-parties that the debtor’s interest in the property had been transferred. Both the Bankruptcy Court and the District Court held that the recording of the Affidavit of Sale before the bankruptcy case was sufficient notice to third parties under state law because Massachusetts is a “notice” jurisdiction, therefore when the Affidavit of Sale was recorded, it acted as “notice to the world” – including any potential bona fide purchasers – that the foreclosure had taken place. Finding that there was notice of the pre-petition transfer sufficient to defeat avoidance under § 544, the Court did not arrive at any conclusion as to whether the transfer was perfected.

As of the date of this article, the Debtor has filed a notice of appeal to the First Circuit Court of Appeals.

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If the Supreme Court decides in Purdue that bankruptcy courts can issue nondebtor, nonconsensual, third-party releases, and if the district court approves the report and recommendation by Bankruptcy Judge John P. Mastando, III, Subchapter V will have a new, dramatic purpose:  Procuring multimillion-dollar releases for the owners of small businesses when the businesses themselves have little other debt.

The corporate debtor was a notable Broadway producer.   An individual was the sole owner and president of the corporate debtor.

An investor claimed it had not received its share of the income from a pair of productions.   So, the investor initiated an arbitration against the corporate debtor and the owner.  The arbitrator gave the investor an award of $2.9 million against the debtor and the owner, jointly and severally. The district confirmed the award, which was automatically stayed for thirty (30) days.

On the 29th day, the debtor corporation filed a chapter 11 petition under Subchapter V.   The debtor filed an adversary proceeding and persuaded Judge Mastando to enter a preliminary injunction preventing the investor from enforcing the arbitration award against the owner.

The Plan

     The debtor filed a chapter 11 plan to discharge the debtor’s debt owing to the investor and give the owner a release from liability on the $2.9 million arbitration award.   In return, the plan called for the owner to supply $600,000 toward payments under the plan.

The plan called for paying about $275,000 in secured and priority claims in full on confirmation.  The unsecured investor with its $2.9 million claim was in a class of by itself and would receive a portion of the cash from the owner, plus a share of the debtor’s disposable income over the life of the five-year plan.

Unsecured creditors with about $300,000 in claims would receive a pro rata share of the debtor’s disposable income for the duration of the plan.  The owner would receive no distribution but would retain ownership.

The plan required the owner to continue working for the debtor while spending half of his time on the debtor’s affairs. In return, the debtor would be paid an annual salary of $210,000.

The unsecured class voted in favor of the plan, but the investor class voted against the plan, requiring Judge Mastando to consider confirmation as a cramdown under Section 1191(b).

In his November 22 opinion, Judge Mastando found jurisdiction to confirm the plan over objections by the investor and the U.S. Trustee.  However, he read the Second Circuit’s decision in In re Purdue Pharma LP, 69 F.4th 45 (2d Cir. May 30, 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031 (U.S. Aug. 10, 2023), as requiring him to issue a report and recommendation to the district court regarding confirmation of the plan. (Note: Purdue will be argued in the Supreme Court on December 4.)

Because the arbitration award was a joint several liability of the debtor and the owner, Judge Mastando concluded that the plan would be a release of the investor’s “direct” claims against the owner.

The Objections

     Objecting to confirmation, the U.S. Trustee called the plan “abusive” and said it was not a “rare or unusual” case to warrant confirmation under Second Circuit authority. Judge Mastando quoted the U.S. Trustee as characterizing the release in favor of the owner as forcing “‘an involuntary settlement upon [the owner’s] primary creditor.’”

In objecting to confirmation, the investor contended that the plan would give the owner a “multimillion dollar gain” while causing the investor a “large financial loss.”  To the owner’s way of thinking, a 37% recovery was not “fair payment.”

Judge Mastando Confirms the Plan

      Judge Mastando began his analysis of contested confirmation by quoting the Second Circuit in Purdue as “consistently” holding “that bankruptcy courts may approve non-consensual third-party releases of direct claims against a non-debtor so long as the release ‘plays an important part in the debtor’s reorganization plan.’ See Purdue, 69 F.4th 45, 75–77 (2d Cir. 2023).” In his 65-page opinion, he proceeded to analyze the seven requisites in Purdue for confirmation of a plan with nonconsensual, nondebtor releases of direct claims.

Among the more pivotal Purdue tests applicable to the case before him, Judge Mastando dealt with them as follows:

Necessity for Successful Reorganization

While a plan “might” be confirmed without the releases, Judge Mastando said that success of the debtor’s business was “almost entirely dependent” on the owner’s continued participation that would be “severely” endangered were the investor to enforce the arbitration award against the owner.

The Owner’s ‘Substantial’ Contribution

Judge Mastando found that the owner’s cash contribution and his commitment to work for the debtor after confirmation were “substantial.”

‘Overwhelming’ Support from the Affected Class

Judge Mastando conceded that the investor class’s opposition meant that support from the class was “indisputably not ‘overwhelming.’”

“Nevertheless,” Judge Mastando said that the investor’s objection “has little weight as to the propriety of a non-consensual third-party release here,” based on two findings. First, he said that Subchapter V “itself contemplates the confirmation of a plan without the consent of any creditor.”

Second, Judge Mastando apparently substituted his judgment for the investor’s by saying “that the Plan is the best possible means of enabling [the investor’s] recovery.”

‘Fair’ Payment for Enjoined Claims

Judge Mastando found “that the Plan would provide all creditors with more than they would be able to collect from either the Debtor or [the owner] in any other situation.” Finding that the plan would eliminate the cost and uncertainty were the investor to attempt collecting the award from the owner, he found “that the Plan provides for fair and equitable payment of the Released Claims.”

Equitable Considerations

Judge Mastando found that “equity” supports confirmation of the plan with its non-debtor releases, in part because the owner and other creditors “will receive more under the Plan than in a chapter 7 proceeding, or in the event [the owner] filed for bankruptcy himself.”

Judge Mastando rejected the U.S. Trustee’s contention that the case did not present “exceptional circumstances.” He also disagreed with the investor’s contention based on the idea that it was not a “high-profile” mass tort case where “the vast majority” supported the plan.

Judge Mastando nonetheless found the case to be “unique” and “exceptional” because the investor was “apparently willing to . . . derail a Plan that would purportedly optimize its own recovery (and the recovery of every other creditor) in order to either drive the Debtor into Chapter 7 or drive the Debtor’s principal into bankruptcy himself.” [Emphasis in original.]

Provided that the debtor makes a minor modification in the plan, Judge Mastando overruled objections to the plan while reporting and recommending that the district court confirm the plan.

Observations from American Bankruptcy Institute’s Editor, William Rochelle

• Will the district court consider Judge Mastando’s recommendation before the Supreme Court rules on Purdue?
• Even if the Supreme Court affirms Purdue and finds authority for bankruptcy courts to issue nondebtor releases, the district court must still consider whether Subchapter V has a peculiar attribute allowing the imposition of nondebtor releases despite overwhelming opposition from the affected class.

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20-3257-cv (L), In re Nine West LBO Sec. Litig.

August Term 2021(Argued:  March 10, 2022

Decided:  November 27, 2023)

Docket Nos. 20-3257-cv (L), 20-3290-cv, 20-3315-cv, 20-3326-cv, 20-3327-cv, 20-3334-cv, 20-3335-cv, 20-3941-cv, 20-3952-cv, 20-3959-cv, 20-3961-cv, 20-3964-cv, 20-3969-cv, 20-3980-cv, 20-3981-cv, 20-3992-cv, 20-3998-cv.

Plaintiffs-appellants Marc Kirschner, as the Litigation Trustee for the Nine West Litigation Trust representing unsecured creditors and Wilmington Savings Fund, FSB, as successor Indenture Trustee for various notes issued by Nine West (together, the “Trustees”), brought seventeen (17) actions in different states against Jones Group’s former directors and officers for unjust enrichment and against its former public shareholders for fraudulent conveyance.   Both the public shareholders and the directors and officers moved to dismiss the claims against them, arguing that payments made to them in connection with the merger are shielded by the Bankruptcy Code’s Section 546(e) safe harbor.   The district court granted both motions to dismiss, holding that the payments were shielded by the safe harbor.  In re Tribune Co. Fraudulent Conv. Litig. (Tribune II), 946 F.3d 66, 72 (2d Cir. 2019), cert. denied sub nom. Deutsche Bank Tr. Co. Americas v. Robert R. McCormick Found., 141 S. Ct. 2552 (2021

Plaintiffs appealed.

Section 546(e) of Chapter 11 of the Bankruptcy Code precludes avoidance of “settlement payment[s] . . . made by or to (or for the benefit of) a . . . financial institution, . . . or . . . transfer[s] made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract . . . .”  11 U.S.C. § 546(e).   The Code defines “financial institution” to include not only banks but also a customer of a bank “when [the bank] is acting as agent or custodian for a customer . . . in connection with a securities contract.”  Id.§ 101(22)(A).

The two leading cases interpreting the safe harbor provision are Merit Management, 138 S. Ct. 883 (2018) and Tribune II, 946 F.3d 66 (2d Cir. 2019).   The Supreme Court held in Merit Management, 138 S. Ct. at 892 and we recognized in Tribune II, 946 F.3d at 77, that § 546(e) does “not protect transfers in which financial institutions served as mere conduits.”  In Tribune II, however, we concluded that an agency relationship provided an “alternative basis for finding that the payments [were] covered.”  946 F.3d at 77; see also11 U.S.C. § 101(22)(A).   511 U.S.C. § 741(7) defines the term “securities contract” broadly.

Section 546(e) has been uniformly recognized as an affirmative defense, though not yet by this Court.   We have, however, held that safe harbors in other statutory schemes are affirmative defenses.  Accordingly, we hold today that 11 U.S.C. § 546(e) is an affirmative defense.

Plaintiffs are under no obligation to plead facts supporting or negating an affirmative defense in the complaint.  See, e.g., Picard v. Citibank N.A. (In re Bernard L. Madoff Inv. Sec. LLC), 12 F.4th 171, 195 (2d Cir. 2021) (first citing Fed. R. Civ. P. 8(c); and then citing Perry v. Merit Sys. Prot. Bd., 137 S. Ct. 1975, 1987 n.9 (2017) (“An affirmative defense to a plaintiff’s claim for relief is not something the plaintiff must anticipate and negate in her pleading.” (cleaned up))), cert. denied sub nom.  Citibank, N.A. v. Picard, 142 S. Ct. 1209 (2022).

The Second Circuit affirmed in part, vacated in part and remanded.  The court explained that Congress enacted Section 546(e) safe harbor to promote finality and certainty for investors by limiting the circumstances under which securities transactions could be unwound by, for example, a successful fraudulent conveyance action.   The court wrote that to further expand the scope of Section 546(e) and Section 101(22)(A) and immunize transactions in which a bank took only purely ministerial action, made no payments and had no discretion would not further Congress’s purpose.   Accordingly, the court vacated the district court’s judgment to the extent it dismissed the Payroll Transfer claims.

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