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Hannon v. City of Newton

United States District Court, D. Massachusetts

May 11, 2018




         In July of 2010, Patrick Hannon won a state court judgment against the City of Newton for underpayment in an eminent domain case. Various of his creditors, however, asserted claims - arising from liens they held on the underlying property - over the proceeds of the judgment.

         While the lien claims were under consideration in this Court, Hannon petitioned for bankruptcy. Meanwhile, unaware of the pending bankruptcy, I awarded judgment to a creditor, Rita S. Manning, who had obtained a judgment against Hannon. On appeal, the United States Court of Appeals for the First Circuit reversed and determined that the United States was entitled to the entirety of the proceeds due to its tax lien. Hannon v. City of Newton, 744 F.3d 759 (1st Cir. 2014).

         When the case returned to me on remand, the bankruptcy Trustee pressed the question whether the judgment proceeds should be distributed directly to the United States as the senior creditor or to the bankruptcy Trustee to then distribute as part of his administration of the bankruptcy estate. The bankruptcy judge in a decision affirmed by the First Circuit on appeal, In re Hannon, 839 F.3d 63 (1st Cir. 2016), has declined to permit a bankruptcy discharge. The funds marshalled by the Trustee will be distributed pursuant to a liquidation under Chapter 7.

         I. BACKGROUND

         A. Factual Background

         In early 2007, the City of Newton, Massachusetts sought to take a parcel of Hannon's land through eminent domain. Multiple creditors (including the United States and Rita S. Manning), held liens against this property prior to the eminent domain proceedings. The United States had a tax lien for over $7 million dollars, by far the largest of the liens on the property.

         The City of Newton authorized $2.3 million for the taking of the property. However, before it could do so, it needed the federal government to relinquish its claim on the property resulting from the tax lien. The United States agreed to relinquish its claim and filed a Certificate of Discharge, discharging its lien over the property. The United States ultimately received $57, 214.55, the amount remaining from the eminent domain money after payment to the mortgagee of the property, a creditor with a more senior claim to the funds.

         On November 10, 2008, Hannon commenced proceedings against the City of Newton in Massachusetts state court claiming that the amount paid by the City was not just compensation for the value of the land. The Commonwealth of Massachusetts, a tax creditor, and Rita S. Manning, a junior creditor, intervened in the suit asserting priority to receive any judgment. The IRS did not intervene at that time, but issued a Notice of Levy to the City of Newton attaching Hannon's property. On July 6, 2010, a jury found that Hannon had been undercompensated, and awarded him an additional $420, 000. Instead of paying Hannon directly, the City of Newton deposited the funds in a Massachusetts Superior Court account, pending determination of what party or parties had a claim to the funds. The Superior Court then undertook to determine which parties should receive a distribution.

         In December 2010, the Superior Court ordered that Hannon's attorneys receive $151, 761.74 of the judgment, leaving $299, 483.99 of the proceeds to be distributed to Hannon's various creditors. In January 2011, the United States removed the action to this Court, and Massachusetts disclaimed any interest in the judgment proceeds. The United States and Manning both moved for summary judgment on the question of their relative lien priorities. The parties agreed that the government's lien was senior to Manning's. However, there remained the question whether the government's previously-executed Certificate of Discharge prevented it from recovering any further proceeds related to the property.

         On October 24, 2011, I entered judgment in favor of Manning and ordered that the funds from the trial be distributed to Manning, with any remainder going to the United States as an unsecured creditor. Hannon v. City of Newton, 820 F.Supp.2d 254 (D. Mass. 2011), rev'd, 744 F.3d 759 (1st Cir. 2014). After my original ruling, the United States timely filed a motion for reconsideration.

         Meanwhile, Hannon filed a petition for Chapter 11 bankruptcy on May 3, 2012. In his filing, he listed the judgment proceeds as a “possible interest” on his Schedule B of personal property assets. Not having been advised of the pending bankruptcy proceeding and the automatic stay which attended it, I denied the government's motion for reconsideration on September 24, 2012. Hannon v. City of Newton, No. 11-10021-DPW, 2012 WL 4390527 (D. Mass. Sept. 24, 2012).

         After my denial of this motion, the United States successfully sought relief from the automatic stay in the Bankruptcy Court in order to permit it to appeal my judgment in the interpleader action and to collect the appropriate portion of the interpleader fund. On October 30, 2012, the Bankruptcy Court granted the motion by bare endorsement without adopting the form of order submitted by the United States.

         The United States appealed my ruling on the interpleader action to the First Circuit in November 2012. Thereafter, in December, Joseph Baldiga was appointed Chapter 11 Trustee in Hannon's bankruptcy. He moved to convert the bankruptcy from a Chapter 11 reorganization bankruptcy to a Chapter 7 liquidation bankruptcy. The Bankruptcy Court approved the conversion in January 2013. In May 2013, while the interpleader appeal was pending before the First Circuit, the Trustee moved to intervene before me in this case, but I took no action on the motion during the pendency of the appeal. In February 2014, the First Circuit reversed my determination regarding creditor priorities and remanded the matter to this Court with instructions to enter summary judgment in favor of the United States. Hannon v. City of Newton, 744 F.3d 759 (1st Cir. 2014).

         The United States thereupon moved for entry of final judgment and distribution of funds, which the Trustee opposed as a potential intervenor. I granted both the Trustee's motion to intervene on remand and the United States' motion for entry of final judgment and distribution of funds. The allowance of these motions was designed to frame the issue for appellate review by permitting the United States to move for reconsideration of the Trustee's intervention, and permitting the Trustee to file a motion to stay entry of the judgment.

         The Trustee and the United States did exactly that. The Trustee filed a motion to stay entry of final judgment in favor of the United States in this court and to direct distribution of the proceeds to the Trustee for distribution through the Bankruptcy Court. The United States filed a motion for reconsideration of my decision to allow the Trustee to intervene. I denied the United States' motion for reconsideration orally, and took the Trustee's motion for distribution under advisement. I have since received further submissions from the parties. This Memorandum and Order will address the final disposition of the funds in this proceeding.

         II. ANALYSIS

         The United States advances several arguments as to why the final distribution should be distributed directly to it without passing through the bankruptcy estate.

         The first is that my October 24, 2011 grant of summary judgment to Ms. Manning was a final order for purposes of bankruptcy transfer avoidance. The thrust of this argument is that the finality of the order should foreclose any other potential claim to the funds, including any claim by the Hannon bankruptcy estate.

         The second argument is that, by not participating in the dispute over the interpleader funds between Manning and the United States, Hannon (and, now, his bankruptcy estate) implicitly abandoned any claim he may have had to the interpleader fund.

         The third argument concerns an issue that was not originally briefed, but for which I requested additional briefing that is now before me. This is whether in light of the Notice of Levy sent by the IRS to the City of Newton on May 19, 2010, the bankruptcy Trustee in the instant case is barred by the nine month statute of limitations from bringing a third-party wrongful levy challenge against the IRS.

         Fourth, the United States argues that the conversion of Hannon's bankruptcy from a Chapter 11 ...

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