It’s Official: Amann Burnett, PLLC remains Undefeated before the 1st Circuit Bankruptcy Appellate Panel
While we hope we are not jinxing any future cases before the First Circuit B.A.P., we are glad to be fortunate enough to continue winning for our clients.
The 1st Circuit BAP DISMISSED the Maven Trust’s appeal for lack of standing. As to the Berkowitzes’ appeal, it concluded that they did not demonstrate that the bankruptcy court’s disallowance of their claims was a result of a clearly erroneous factual finding or an error of law. Therefore, the BAP AFFIRMED the Claims Order to the extent that it disallowed the Berkowitzes’ Proof of claims.
Bonni Berkowitz, Barbara Berkowitz, and Rowley Solar, LLC (“Rowley Solar”) hired Invaleon Technologies Corporation (“Invaleon”) to construct a solar array on their property.
Disputes arose between the parties during the construction process. After Rowley Solar filed for bankruptcy, the parties settled their disputes through a court-approved settlement agreement, which provided for the release of the Berkowitzes’ claims against Rowley Solar. When the Berkowitzes later filed proofs of claim in the bankruptcy case, Invaleon objected on the basis that the claims had been released. The Berkowitzes countered that the settlement agreement was voidable because they had been fraudulently induced to execute it.
Finding no fraud and deeming the settlement agreement valid, the bankruptcy court disallowed the claims. The Berkowitzes and their realty trust, Maven Revocable Trust (“Maven Revocable Trust”), appealed. For the reasons discussed below, we DISMISS Maven Trust’s appeal for lack of appellate standing. Discerning no error by the bankruptcy court in disallowing the Berkowitzes’ claims, we AFFIRM.
Maven Trust owns real property located at 623 Wethersfield Street, Rowley, Massachusetts (the “Property”). Bonni Berkowitz and her mother, Barbara, resided at the
Property. More than a decade ago, Bonni and Barbara formed Rowley Solar for the purpose of developing a solar farm on the Property. Bonni and Barbara were the sole members of Rowley Solar.
In 2018, to obtain construction financing, Rowley Solar entered into a Membership Interest Purchase Agreement (the “MIPA”) with Invaleon, whereby Invaleon agreed to acquire Rowley Solar’s membership interests and assume all construction and operation costs for the solar farm. Invaleon agreed to pay $949,640 in three installments based on the project reaching
certain milestones: the first was payable at closing, the second upon the project reaching “mechanical completion” (meaning the solar array was capable of producing power but was not
yet connected to the power grid), and the third upon receiving “permission to operate” from the municipality. In return, Rowley Solar was obligated to assign its membership interests to
Invaleon. The first installment of the purchase price was remitted by Invaleon to theBerkowitzes, but no assignment agreement was ever executed or delivered.
Invaleon installed the solar array, and on February 21, 2019, an engineer issued a “certificate of mechanical completion.” Invaleon, however, did not pay the second installment
(or the third) because it had not received an assignment of the membership interests. Invaleon requested the same from the Berkowitzes, but they refused, insisting they were not obligated to assign the membership interests until all payments under the MIPA were made. They also complained about the work performed by Invaleon and its conduct at the project site.
During the spring of 2019, Invaleon, the Berkowitzes, and Rowley Solar attempted, unsuccessfully, to resolve their dispute. Eventually, Invaleon sued the Berkowitzes in state court
and then, on July 7, 2019, Maven Trust served a Notice of No Trespass prohibiting Invaleon from entering the Property “at any time for any reason,” indefinitely.
Ten days later, Rowley Solar filed a chapter 11 petition. Invaleon moved to dismiss the case on the theory that the Berkowitzes lacked the authority to sign and file a petition for Rowley Solar. Both Rowley Solar and the Berkowitzes objected, arguing there had been no transfer of the membership interests.
Negotiations between the parties resumed and about a month later, Rowley Solar, the Berkowitzes, and Invaleon executed a Stipulation of Settlement (the “Settlement Agreement”).
Maven Trust was not a party to the agreement. The Settlement Agreement: (1) obligated Rowley Solar to sell substantially all its assets; (2) provided for a distribution of the bulk of the sale
proceeds to Invaleon; (3) required Invaleon to pay $75,000 to the Berkowitzes “as full satisfaction” of their claims against Rowley Solar and Invaleon; and (4) required Invaleon to pay
“all allowed claims” in the bankruptcy case. Invaleon was expressly prohibited from bidding on Rowley Solar’s assets. If, however, the successful bidder failed to close, Invaleon would be
deemed the successful bidder for a purchase price which included payment of $656,000 to the Berkowitzes. In such an event, the parties agreed to employ “a mutually satisfactory third party manager such that neither [Invaleon] nor any of its employees [would] be present or be required to be present on the premises.”
Thereafter, the bankruptcy court approved the Settlement Agreement and authorized Rowley Solar to sell its assets to the successful bidder, PowerFund 1, LLC (“PowerFund”).
Shortly after the sale closed, Invaleon entered the project site several times at PowerFund’s request. At some point after the Settlement Agreement had been approved, the Berkowitzes filed proofs of claim totaling about $327,000, based primarily on pre-petition loans to Rowley Solar. Maven Trust also filed a proof of claim for about $320,000, based on “[e]stimated contingent liability for complying with permits.”
Invaleon filed an objection to these claims (the “Claims Objection”), arguing they should be disallowed because the Berkowitzes and Maven Trust had received $75,000 under the
Settlement Agreement “as full satisfaction” of their claims against Rowley Solar and had released the balance of their claims. The Berkowitzes responded that they should not be bound
by the Settlement Agreement because they were induced to execute it by Invaleon’s fraudulent representations that the solar farm was “mechanically complete” and that Invaleon would have no further involvement with the project and would not appear at the project site. These representations were “materially false,” they argued, as evinced by Invaleon’s post-sale presence at the project site and evidence reflecting that the mechanical completion certificate was “false.” Had they known Invaleon’s representations were false, the Berkowitzes claimed, they would never have entered into the Settlement Agreement. The Berkowitzes also asserted that, although they “had every financial incentive” for Invaleon to become the successful bidder, because Invaleon would have to pay them the $656,000 owed under the MIPA, they decided to forfeit the money because they “did not want [Invaleon] as their neighbor or tenant.” They also argued that Maven Trust was not a party to the Settlement Agreement and had not released its claims against the estate.
On April 18, 2022, the bankruptcy court entered an order and opinion (the “Claims Order”):
(1) overruling Invaleon’s objection to Maven Trust’s claim and allowing that claim; and
(2) sustaining the objection as to the Berkowitzes’ claims and disallowing those claims. The bankruptcy court ruled that Maven Trust’s proof of claim was filed in accordance with the Bankruptcy Rules and consequently “enjoy[ed] prima facie validity,” and that there was no evidence that Maven Trust—not a party to the Settlement Agreement—had released its claim. As to the Berkowitzes, the bankruptcy court rejected their argument that they were fraudulently induced to execute the Settlement Agreement and should not be bound by it, as well
as their alternative argument that they were entitled to damages in the amount of their claims due to Invaleon’s alleged breach of the Settlement Agreement.
The court found the Berkowitzes had not satisfied their burden of establishing a material misrepresentation. The court emphasized that the Berkowitzes had “identified only one allegation of fraud on which they [we]re relying: their allegation that they were induced to enter into the Settlement Agreement by a false promise by Wu, on behalf of Invaleon, that Invaleon would never again set foot on the project site.” It found, however, that the Settlement Agreement included no such promise or agreement by Invaleon. The court articulated three
bases for this finding. First, the court stressed that “no such term or promise appears in the writing that constitutes the Settlement [Agreement].” The court recognized that the Settlement
Agreement did not include an integration clause and therefore it was possible that the term was agreed to but not included in the written agreement. It found, however, “by a preponderance of the evidence that, had this term been negotiated and agreed upon, it would have appeared in writing in the Settlement [Agreement].” Second, the court found the Berkowitzes had “no need for the prohibition and promise in question because they already had the no trespass order” and such a term “would have been redundant.” Third, the court stated, there was “simply no evidence that Wu, for Invaleon, agreed to this term or made this promise orally or in any manner.
No such term was ever negotiated or agreed upon.” The court noted that “Wu, for Invaleon, understood that the Berkowitzes strongly desired that Invaleon never come onto the project site
again” and “[t]his desire clearly did inform how the [parties] dealt with the contingency of Invaleon’s becoming the owner of the project.” But, the court emphasized, the parties did not
address other possible scenarios in which Invaleon “might need or want to come onto the property,” such as to assist a third-party buyer with its operation, maintenance, or completion of
the project. “The fact that the Berkowitzes had made their position clear,” the court stated, did not mean that Invaleon made a promise that it would never enter the project site again for any reason.
The bankruptcy court also rejected a fraud in the inducement claim based on representations made by Wu during negotiations that the project was “mechanically complete”
and ready to be turned on. The bankruptcy court explained that, although there was “considerable evidence” that the engineer had issued a certificate of mechanical completion
without having performed the necessary inspection, the Berkowitzes had failed to establish that the project was not, in fact, mechanically complete or that Wu’s representations regarding
mechanical completion were false. The court further found the Berkowitzes had failed to prove that they relied on Wu’s representations regarding mechanical completion when entering into the Settlement Agreement. The bankruptcy court concluded, therefore, that the Berkowitzes had “failed to show fraud in the inducement.” The bankruptcy court also rejected the Berkowitzes’ alternative argument that Invaleon breached the Settlement Agreement by entering the project site after the sale and that they were entitled to damages in the amount of their claims for that breach. Because the SettlementAgreement did not contain a requirement that Invaleon stay off the Property, the court
determined that Invaleon had not violated the Settlement Agreement by entering the Property.
This appeal followed. On appeal, the Berkowitzes challenge the bankruptcy court’s factual finding that Invaleon did not agree to stay off the Property, stating there was “substantial”
evidence in the record that such a promise was made. They also challenge the bankruptcy court’s finding that they did not reasonably rely on promises made by Invaleon, insisting their
reliance was “reasonable” because the “main reason for the [Settlement Agreement] . . . was to be rid of” Invaleon. Invaleon counters that, other than Bonni Berkowitz’s own testimony, the
record is devoid of any evidence demonstrating that Invaleon promised or agreed to not enter the project site ever again for any reason.
This appeal was filed jointly by Bonni Berkowitz, Barbara Berkowitz, and Maven Trust. The Claims Order, however, disallowed only the Berkowitzes’ claims. Because the Claims
Order overruled Invaleon’s objection to Maven Trust’s claim and allowed that claim in its entirety, and as there is nothing in the record to suggest that the disallowance of the Berkowitzes’ claims caused any direct, pecuniary harm to Maven Trust, we conclude that Maven Trust was not aggrieved by the Claims Order and thus lacks standing to appeal. See In re El San Juan Hotel, 809 F.2d 151, 154 (1st Cir. 1987) (stating that standing to appeal from a final bankruptcy court order is accorded only to “‘persons aggrieved,’ i.e., to those persons whose rights or interests are ‘directly and adversely affected pecuniarily’ by the order”) (citations omitted); see also Elkin v. Metro. Prop. & Cas. Ins. Co. (In re Shkolnikov), 470 F.3d 22, 24 (1st Cir. 2006) (“It is an abecedarian rule that a party cannot prosecute an appeal from a judgment in its favor.”) (citations omitted). This appeal is, therefore, dismissed as to Maven Trust for lack of standing.
“Sections 501 and 502 govern the filing and allowance of creditor claims in bankruptcy proceedings.” Am. Express Bank, FSB v. Askenaizer (In re Plourde), 418 B.R. 495, 502 (B.A.P.
1st Cir. 2009) (citing Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007)). Section 501(a) allows a creditor to assert a claim in a bankruptcy case by filing a proof
of claim. 11 U.S.C. § 502(a). “When a proof of claim is filed under [§] 501, the claim ‘is deemed allowed, unless a party in interest . . . objects.’” In re Russell, No. 22-10083, 2023 WL
320983, at *1 (Bankr. D. Me. Jan. 19, 2023) (quoting 11 U.S.C. § 502(a)). “But even where a party in interest objects, the court ‘shall allow’ the claim ‘except to the extent that’ the claim
implicates any of the nine exceptions enumerated in § 502(b).” Travelers, 549 U.S. at 449 (quoting 11 U.S.C. § 502(b)). “The first of those nine exceptions provides that a claim is not to
be allowed if it is ‘unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or
unmatured[.]’” In re Russell, 2023 WL 320983, at *1 (quoting 11 U.S.C. § 502(b)(1)). “The Supreme Court has recognized the statutory presumption that ‘claims enforceable under
applicable state law will be allowed in bankruptcy unless they are expressly disallowed’ under [§] 502(b).” Id. (quoting Travelers, 549 U.S. at 452).
“Sections 501 and 502 are complemented by Fed. R. Bankr. P. 3001, which provides ‘the procedural framework for the filing and allowance of claims’ . . . .” Id. at *2 (quoting In re
Plourde, 418 B.R. at 503). Bankruptcy Rule 3001(f) states that a properly executed proof of claim “shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R.
Bankr. P. 3001(f). “Once presumptive validity is established, the burden rests on the [objecting party] to refute the validity or the amount of the claim with ‘substantial evidence.’” In re
Russell, 2023 WL 320983, at *2 (quoting Juniper Dev. Grp. v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir. 1993)). If the objecting party produces “substantial evidence” in opposing a proof of claim, “[t]he burden then shifts to the claimant to prove his or her claims by a preponderance of the evidence.” Iatrou v. Darr (In re Iatrou), No. 20-40112-DPW, 2022 WL 220323, at *7 (D. Mass. Jan. 25, 2022) (citation omitted).
In Massachusetts, “[a]bsent an ambiguity, the court interprets a contract according to its plain terms, in a manner that gives reasonable effect to each of its provisions.” Weiss v. DHL
Express, Inc., 718 F.3d 39, 45 (1st Cir. 2013) (citations and internal quotation marks omitted). Here, the plain terms of the Settlement Agreement included a release of the Berkowitzes’ claims against the bankruptcy estate and did not contain a provision that Invaleon would refrain from entering the project site again. Instead, the Berkowitzes argue that the Settlement Agreement was invalid because they were fraudulently induced to enter it by a verbal promise by Wu, on behalf of Invaleon, during contract negotiations. Fraud in the inducement “concern[s] the validity of the formation of the contract . . . .”Berwind Prop. Grp. Inc. v. Env’t Mgmt. Grp., Inc., No. 04-11411-NMG, 2007 WL 4707647,
at *3 (D. Mass. Feb. 5, 2007) (applying Massachusetts contract law). If the Berkowitzes were fraudulently induced to enter into the Settlement Agreement, then it was voidable, and they were not bound by its terms. See id. (stating that “contracts induced by fraudulent misrepresentations . . . are voidable at the election of the party who justifiably relied on the misrepresentations”) (citation omitted); see also Griffin v. Coghill, No. 17-cv-11619-IT, 2018 WL 1122361, at *7 (D. Mass. Mar. 1, 2018) (“A party who has been fraudulently induced by the defendant into entering a contract can rescind that contract.”) (citing Shaw’s Supermarkets, Inc. v. Delgiacco, 575 N.E.2d 1115, 1117 (Mass. 1991)).
In Massachusetts, the elements required to prove fraud in the inducement are:
(1) “misrepresentation of a material fact”; (2) “made to induce action”; and (3) “reasonable
reliance on the false statement to the detriment of the person relying.” Com. Bank & Tr. Co. v.
Hayeck, 709 N.E.2d 1122, 1126 (Mass. App. Ct. 1999) (citation omitted).
“Massachusetts law clearly states that statements of present intention as to future conduct may be the basis for a fraud action if . . . the statements misrepresent the actual
intention of the speaker and were relied upon by the recipient to his damage.” McEvoy Travel Bureau, Inc. v. Norton Co., 563 N.E.2d 188, 192 (Mass. 1990) (citations omitted). Therefore,
“for a promise [regarding future conduct] to constitute fraud in the inducement, the promisor must intend not to carry out the promise and this intent must exist at the time the promise is
made.” Coastal Energy, Inc. v. R.W. Granger & Sons, Inc., No. 96-1019, 1998 WL 1184106, at *3 (Mass. Super. Ct. Jan. 28, 1998) (citing McCartin v. Westlake, 630 N.E.2d 283, 289 n.11
(Mass. App. Ct. 1994)). “Mere evidence that a promise was not performed is insufficient to prove intent.” Michelle Holdings, LLC v. Johnston, No. 19-P-1444, 2021 WL 117119, at *3
(Mass. App. Ct. Jan. 13, 2021) (citations omitted). To prevail on a claim for breach of contract under Massachusetts law, the plaintiff must demonstrate that: (1) “there was an agreement between the parties”; (2) “the agreementwas supported by consideration”; (3) “the plaintiff was ready, willing, and able to perform his or her part of the contract”; (4) “the defendant committed a breach of the contract”; and (5) “the plaintiff “the plaintiff suffered harm as a result.” Bulwer v. Mount Auburn Hosp., 46 N.E.3d 24, 39 (Mass. 2016). “An agreement is breached when a party to the agreement, without legal excuse, fails to comply with a material term of the agreement.” Amcel Corp. v. Int’l Exec. Sales, Inc.,
No. 93-11128-RCL, 1997 U.S. Dist. LEXIS 23543, at *23 (D. Mass. Sep. 26, 1997) (citing Realty Developing Co. v. Wakefield Ready-Mix Concrete Co., 100 N.E.2d 28, 30 (Mass. 1951)).
The Berkowitzes’ breach of contract claim was based on an alleged agreement between the parties that Invaleon would never enter the project site again under any circumstances. As
stated previously, it is undisputed that the Settlement Agreement contains no such provision.
Further, the bankruptcy court found that no verbal agreement between the parties was made during contract negotiations. Having concluded that this finding was not clearly erroneous, it necessarily follows that the bankruptcy court did not err in ruling that, in the absence of such an agreement between the parties, there was no breach of a material term. Because the Berkowitzes did not establish an agreement to refrain from entering the project site, let alone any breach of amaterial contract term by Invaleon, they were not entitled to damages, and the bankruptcy court did not err in disallowing their claims.
In sum, because the bankruptcy court correctly rejected both the Berkowitzes’ fraud in the inducement defense and breach of contract claim, we conclude that the bankruptcy court did
not commit reversible error in disallowing the Berkowitzes’ claims.
