Gordon Green filed for Chapter 7 bankruptcy on May 11, 2021, listing his “Sun Life: Life Income Fund,” a Canadian Registered Retirement Savings Plan, as an asset. Green sought to exempt the fund under Illinois statute 735 ILCS 5/12-1006, which exempts assets intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code (IRC). The bankruptcy trustee objected, arguing that the fund, organized under Canadian law, did not qualify for the exemption. The bankruptcy court agreed, holding that a retirement plan must be organized under IRC § 401(a), which requires the trust to be created or organized in the United States.

Green appealed to the United States District Court for the Northern District of Illinois. The district court rejected the bankruptcy court’s country-of-origin requirement but still found that the Sun Life Fund was not a tax-qualified retirement plan under the IRC. Consequently, the district court affirmed the denial of the exemption.

The United States Court of Appeals for the Seventh Circuit reviewed the case de novo. The court examined whether the Sun Life Fund qualified as a retirement plan under applicable provisions of the IRC. The court noted that the IRC does not specifically define “retirement plan” for this purpose and that Illinois law requires the plan to qualify under applicable IRC provisions. The court found that the Sun Life Fund did not meet the criteria for tax-qualified retirement plans under the IRC, as it was not governed by any specific IRC provision that regulates retirement plans. The court affirmed the district court’s decision, holding that the Sun Life Fund was not exempt under Illinois statute 735 ILCS 5/12-1006.

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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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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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The often-cited case in New Hampshire comes from the seminal case Harkeem v. Adams.  In that case the New Hampshire Supreme Court articulated the rule for fee shifting as follows:

“Where an individual is forced to seek judicial assistance to secure a clearly defined and established right, which should have been freely enjoyed without such intervention, an award of counsel fees on the basis of bad faith is appropriate.” Id. (internal citations omitted)

The Court’s rational for departure from the traditional rule was, shifting the cost of what should have been an unnecessary judicial proceeding to the responsible party, has long been recognized in New Hampshire in a related line of cases wherein attorneys’ fees have been awarded on the basis of the courts’ power to enforce their own decrees.  Id at 691.

Wow!  A case from 1977—is that still good law?  Subsequently in Glick v. Naess, 143 N.H. 172 (1998), the New Hampshire Supreme Court went further and defined a “reasonableness” standard.  See Glick, 143 N.H. 172 at 175 (1998). “[O]ne exception exists [to the general rule] where a party must “litigate against an opponent whose position is patently unreasonable.”  Id.  A claim is patently unreasonable when it is “commenced, prolonged, required or defended without any reasonable basis in the facts provable by evidence, or any reasonable claim in the law as it is, or as it might arguably be held to be.”   A party’s unreasonableness “is treated on an objective basis as a variety of bad faith and made just as amenable to redress through an award of counsel fees as would be the commencement of litigation for the sole and specific purpose of causing injury to an opponent.”  Id. (internal citation omitted).

In sum, the prevailing rule that each litigant pays his or her own costs is controlling in the vast majority of cases absent a showing of independent entitlement via contractual right or statutory grant.

The exceptions to the general rule are litigation to secure a clearly defined established right that should be freely enjoyed or a claim that is patently unreasonable on its face such that it is litigated for the specific purpose of causing injury to an opponent.  One last word of caution.  In our experience, most litigants subjectively, passionately and earnestly believe that the opposing party is acting unreasonably and in bad faith.  A Court is going to apply an objective test.  If you are a litigant, it is important to trust your counsel and ask them to evaluate any claims appropriately so you can make the best, informed decision.

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In Massachusetts, for example, mechanic’s liens are governed by General Laws chapter 254. That statute requires a lienholder to record certain notices and statements at the Registry of Deeds and eventually file suit to enforce the lien. These steps must be accomplished within very strict deadlines or the lien will not be enforceable. What if, in the meantime, a general contractor or property owner files for bankruptcy protection before a lienholder can file its complaint to enforce the lien?

The answer involves a complex interaction between state mechanic’s lien law and federal bankruptcy law, particularly the bankruptcy automatic stay, which typically stays most efforts to perfect a lien after a bankruptcy case is filed. There is an exception to this at § 362(b)(3) of the Bankruptcy Code which permits a to complete the lien perfection process if its lien rights arose before the bankruptcy case was filed. This includes mechanic’s liens for work and materials that were provided prior to the bankruptcy filing. Contractors may record the required documents to comply with the perfection process without violating the automatic stay, however, in states that require a contractor to file suit in order to enforce the lien (like Massachusetts), doing so would violate the automatic stay. Instead, the Bankruptcy Code provides a means at §§ 546(b)(2) and 108(c) to preserve the right to enforce the lien by filing a so-called “lien preservation notice” with the Bankruptcy Court within the same time period required under the state mechanic’s lien statute to enforce the lien. Although not required, it is advisable to also record a copy of the notice at the appropriate land records office. If the notice is timely filed, the statute of limitations to file an action to enforce the lien is extended or “tolled” until the automatic stay expires or is terminated, plus 30 days, thus permitting the contractor to enforce the lien in the bankruptcy case, if possible, or after the bankruptcy case has ended.

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The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), 48 U.S.C. 2101, creates the Financial Oversight and Management Board, an “entity within the territorial government” of Puerto Rico. The Board approves and enforces the Commonwealth’s fiscal plans, supervises its borrowing, and represents Puerto Rico in Title III cases, modeled on federal bankruptcy proceedings. PROMESA does not explicitly abrogate sovereign immunity but incorporates, as part of its mechanism for restructuring debt, the Bankruptcy Code’s express abrogation of sovereign immunity. PROMESA contemplates other legal claims and sets limits on litigation targeting the Board, its members, and its employees for “actions taken to carry out” PROMESA. It provides that no district court will have jurisdiction over challenges to the Board’s “certification determinations.”

CPI, a media organization, requested materials, including communications between Board members and Puerto Rican and U.S. officials. The request went unanswered. CPI sued the Board, citing the Puerto Rican Constitution as guaranteeing a right of access to public records. The district court concluded that PROMESA abrogated the Board’s immunity. The First Circuit affirmed.

USSThe Supreme Court reversed. PROMESA does not abrogate the Board’s immunity. Congress must make its intent to abrogate sovereign immunity “unmistakably clear.” PROMESA does not do so. Except in Title III debt-restructuring proceedings, the statute does not provide that the Board or Puerto Rico is subject to suit. PROMESA’s judicial review provisions are not incompatible with sovereign immunity but serve a function without an abrogation of immunity. Litigation against the Board can arise even though the Board enjoys sovereign immunity generally. Statutes other than PROMESA abrogate its immunity from particular claims; the Board could decide to waive its immunity from particular claims. Providing for a judicial forum and shielding the Board, its members, and employees from liability do not make the requisite clear statement.

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To resolve a split of circuits, the Supreme Court heard oral argument in Tyler v. Hennepin County to decide whether a real estate tax foreclosure violates the Takings Clause of the Fifth Amendment when a municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property.

Oral argument on April 26 was the last argument of the term that began in October. Given the significance of the case in terms of constitutional law, the Court allowed almost two hours for argument. The Court will hand down a decision before the term ends in late June.

The decision in Tyler may (or may not) resolve a long-standing circuit split on the question of whether a tax foreclosure can be attacked in bankruptcy as a fraudulent transfer.

Foreclosed for Unpaid Real Estate Taxes

In Tyler, the county had foreclosed a woman’s home to recover $15,000 in real estate taxes. The county sold the home for $40,000 but kept the $25,000 surplus. Conceding the validity of the foreclosure, the homeowner filed a class action under the Takings Clause challenging the county’s retention of the $25,000 surplus.

The district court dismissed the suit for failure to state a claim and was affirmed last year in the Eighth Circuit. Tyler v. Hennepin County, 26 F.4th 789 (8th Cir. 2022). The homeowner filed a petition for certiorari in May.

While the certiorari petition was pending, the Sixth Circuit created a circuit split by holding that a real estate tax foreclosure violated the Takings Clause. Hall v. Meisner, 51 F.4th 185 (6th Cir. Oct. 13, 2022). The municipality in Hall had taken a $300,000 home in satisfaction of $22,250 in real estate taxes but refused to turn over the surplus. The Sixth Circuit denied a motion for rehearing en banc in January. To read ABI’s report on Hall, click here.

Approximately 20 states won’t refund the surplus to the property owner following a real estate tax foreclosure. The Supreme Court’s opinion is likely to affect how other courts interpret the Takings Clause in other contexts. The clause says that “private property [shall not] be taken for public use, without just compensation.”

Standing

At oral argument, the county argued first that the homeowner lacked standing because the complaint nowhere asserted that the homeowner had a property interest in the sale proceeds. According to the county, the complaint only sought a return of the surplus.

Justice Clarence Thomas said he “didn’t think much” of the standing argument. Other justices spent little time on the question.

There are three other certiorari petitions now pending that raise the same constitutional question as Tyler. This writer presumes that the Court will address the merits, perhaps with no mention of standing.

The Merits

The justices seemed inclined to side with the homeowner. For example, Chief Justice John G. Roberts, Jr., proposed a hypothetical where the government took a $5 million property to recover $5 in unpaid taxes. He said, “What’s the point of the Takings Clause” if the government could keep the entire $5 million?

On the other hand, the Chief Justice commented earlier in argument that tax foreclosures are a “deeply rooted right defined by state law.”

The justices spent some time asking questions about the date of valuation to determine the excess. Should it be at the time of foreclosure, or perhaps years later when the municipality sells the property? Justice Neil M. Gorsuch observed that the Court could rule on the question presented and leave the date of valuation for determination in the trial court on remand.

The county stressed the history and tradition regarding tax foreclosures. There is a chance that the Court’s opinion could rest on the understanding of tax foreclosures at the time of the adoption of the Constitution in 1787.

According to the county, a government could conduct a tax foreclosure and retain the excess in the eighteenth century. Justice Elena Kagan said that her mind “rebels” at the idea that the outcome should be controlled by what the result would have been at the founding.

The county conceded that there are different rules for governmental foreclosure of personal property. Were it a car or a bank account, the county said that the government must account to the owner for the surplus.

Justice Kagan and others asked why the law should provide protection for personal property but not for real property. The Chief Justice said that real property is actually more protected than personal property.

Justice Samuel A. Alito, Jr. asked why the government should retain more if it can collect its expenses from the sale.

The U.S. Solicitor General argued on the side of the homeowner. The Solicitor General believes there was an unconstitutional taking but differed with the homeowner about when the taking took place. Did it occur at foreclosure, or when the property was sold?

The writer believes that the Court will find an unconstitutional taking but allow the lower courts to work out the details, such as the date of the taking and the method for valuing the property.

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Opinion Date: April 18, 2023

Judge: Gordon J. MacDonald

Areas of Law: Civil Procedure, Government & Administrative Law, Health Law, Landlord – Tenant, Real Estate & Property Law      Plaintiffs Clearview Realty Ventures, LLC, JHM HIX Keene, LLC, VIDHI Hospitality, LLC, NAKSH Hospitality, LLC, 298 Queen City Hotel, LLC, ANSHI Hospitality, LLC, 700 Elm, LLC, Bedford-Carnevale, LLC, and Carnevale Holdings, LLC, owned commercial real estate on which they operated hotels, some of which offered restaurant services along with banquet or function facilities. Nearly all received federal pandemic assistance of at least $275,000 to help with business losses in the pandemic’s first several months. Two, 700 ELM in Manchester and Carnevale Holdings of Bedford, described in state records as real estate developers, each received over $1.1 million in federal assistance.

They contended that the COVID-19 pandemic was a “natural disaster” and that their buildings were “damaged” within the meaning of RSA 76:21, I (Tax Abatements). Plaintiffs sought relief from the New Hampshire municipalities involved: the Cities of Laconia, Keene, and Manchester, and the Town of Bedford. After denial of their applications, they appealed to the superior court in the applicable county.

Observing that there were thirteen separate lawsuits pending in six counties, they then filed an assented-to motion for interlocutory transfer without ruling and motion to consolidate to allow the coordinated transfer of the common questions of law to the New Hampshire Supreme Court. In this interlocutory transfer without ruling, the Supreme Court was asked to determine: (1) whether, for purposes of RSA 76:21, the COVID-19 pandemic constituted a “natural disaster”; and (2) if so, whether the buildings owned by the plaintiffs were “damaged” by COVID-19 such that they were “not able to be used for [their] intended use” within the meaning of RSA 76:21, I. The Court answered the second question in the negative.  The Court held that hotels damaged by pandemic shutdowns do not qualify for tax abatements because Covid was not a “natural disaster”.

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In Ribadeneira v New Balance Athletics, Inc. (U.S.C.A. No. 21-1831, April 6, 2023) the First Circuit Court of Appeals upheld an arbitration clause in an international breach of contract case.  The pertinent facts as recited by the court are as follows:

“At the beginning of 2013, appellant New Balance Athletics, Inc. (“New Balance”) entered into a contract with Peruvian Sporting Goods S.A.C. (“PSG”) to distribute its products in Peru. In 2015 a new contract was in process of being negotiated between the parties but at that time PSG was already behind with respect to the distribution fees it owed new balance under the original agreement. In their negotiations, both parties understood that while the New Agreement initially would be executed between New Balance and PSG, a new entity — Superdeporte — would be incorporated and would, once operational, replace PSG as the distributor of New Balance products in Peru. Superdeporte and PSG thought they had an agreement and when Superdeporte asked New Balance to be substituted for PSG as distributor New Balance refused.

The instant litigation began when, Plaintiff Ribadeneira on behalf of PSG an Superdeporte sued New Balance in a Peruvian court alleging breach of the Distribution agreement. This Distribution Agreement contained an arbitration clause, which New Balance invoked in 2018 to initiate arbitration proceedings against PSG.

At the conclusion of arbitration, the arbitrator issued a partial final award finding that PSG had breached the agreement and two awards, which imposed liability on PSG and Superdeporte for breach of the Distribution Agreement, and on PSG, Superdeporte, and Ribadeneira for tortious interference. The arbitrator also rejected three counterclaims brought against New Balance.

In response Ribadeneira and Superdeporte filed a motion in the Massachusetts District Court to vacate the arbitration awards. They argued because they were non-signatories of the Distribution Agreement, they could not be bound by the arbitration clause.  Agreeing that the arbitrator had improperly exercised jurisdiction over Ribadeneira and Superdeporte, the district court vacated the awards.”

This appeal followed New Balance raised several arguments on appeal however the First Circuit focused on the District Court’s jurisdictional analysis. The parties agreed that Massachusetts law governed the question. The District Court concluded that New Balance’s assumption and equitable estoppel arguments did not provide a basis for jurisdiction however the Court of Appeals reached the opposite decision.

The First Circuit concluded that the assumption of the contact by Superdeprte making it PSG’s successor in interest and making it bound by the arbitration clause. Citing Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 887 N.E.2d 244, 255 (Mass. 2008), the court held “successor liability may be imposed if “the entity remains essentially the same, despite a formalistic change of name or of corporate form,” such that the successor entity is a “mere continuation of its predecessor,” Kelley, 139 N.E.3d at 323. To determine whether an entity is such a “mere continuation,” Massachusetts courts examine “the continuity or discontinuity of the ownership, officers, directors, stockholders, management, personnel, assets, and operations of the two entities.” Id. They also look to whether, after the reorganization, only one entity continues to exist. See Milliken, 887 N.E.2d at 255. In this “mere continuation” analysis, “no single factor is dispositive”

In the present case, the record was clear, “Superdeporte was created to take over PSG’s role as New Balance’s distributor in Peru. The arbitrator found, and the arbitration record confirms, that New Balance dealt with Superdeporte as its Peruvian distributor from May 2016, when Superdeporte became ready to begin operations. [The] continuity of operations was matched by a substantial continuity of assets. The arbitration record discloses that PSG sold its entire inventory of New Balance products to Superdeporte, and that Superdeporte acquired PSG’s intercompany debt as well as the right to use office premises previously occupied by PSG.”

Because of these continuities the court ultimately found that Superdeporte was bound by the arbitration clause and that the arbiter property exercised jurisdiction. This is yet another in a long line of cases upholding arbitration clauses in contract cases.

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