Patrick J. Hannon v. City of Newton, et al.

Filing 89

Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered granting 72 Motion for distribution of interpleader fund to the bankruptcy estate. (Woodlock, Douglas)

Case 1:11-cv-10021-DPW Document 89 Filed 05/11/18 Page 1 of 25

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

PATRICK J. HANNON,

)
)
Plaintiff,
)
)
)
v.
)
)
CITY OF NEWTON,
)
)
Defendant.
)
--------------------------------)
)
)
UNITED STATES OF AMERICA and
)
JOSEPH BALDIGA, CHAPTER 7
)
TRUSTEE OF THE BANKRUPTCY
)
ESTATE OF PATRICK J. HANNON
)
AND ELIZABETH B. HANNON,
)
)
Intervenors.
)

CIVIL ACTION NO.
11-10021-DPW

MEMORANDUM AND ORDER
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

Case 1:11-cv-10021-DPW Document 89 Filed 05/11/18 Page 2 of 25

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.

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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.
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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 previouslyexecuted 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
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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

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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
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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 thirdparty wrongful levy challenge against the IRS.
Fourth, the United States argues that the conversion of
Hannon’s bankruptcy from a Chapter 11 proceeding to Chapter 7 is
irrelevant.

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And fifth, the United States argues that, regardless of the
Trustee’s rights with regard to avoidance of transfers, the
October 30, 2012 grant of relief from the bankruptcy stay
permitted the United States to pursue this case, and execute
whatever final judgment resulted, regardless of any claim later
put forward by the Trustee for Hannon’s bankruptcy estate.
A.

Finality of Judgment and Entitlement to Funds
On October 24, 2011, I held that Manning’s lien was

superior to that of the United States and that any and all funds
remaining in the undercompensation interpleader fund should be
paid to the United States after satisfaction of Manning’s lien.
See Hannon, 820 F. Supp. 2d at 261.

None of the funds in the

interpleader fund were ordered to go to Hannon.

At that point,

Hannon’s bankruptcy estate did not yet exist because he did not
file for bankruptcy until May 3, 2012.

After I issued this

final judgment, the government filed a motion to reconsider
under Federal Rule of Civil Procedure 59(e).

The government

acknowledges that this motion suspended my final judgment in
order to preserve the issues presented for appeal.

However, it

argues that the decision was still final with regard to Hannon,
because, regardless of the outcome of my reconsideration, or any
potential appeal, Hannon would not have been entitled to any of
the proceeds.

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While the appeal of my decision was pending, Hannon filed
for bankruptcy.

The Trustee now argues that, because the

judgment was not final by the time Hannon filed for bankruptcy,
Hannon (and, now, the Trustee as his successor), has a property
right in the proceeds.

In advancing this contention, the

Trustee defines a final decision in the bankruptcy context
(i.e., a decision final enough to divest the estate of any
potential property claim) as a final and unappealable decision.
Under this definition, the judgment was not final when Hannon
filed for bankruptcy.

This is because, in accordance with First

Circuit precedent, timely motions under Rule 59(e) “suspend the
finality of the original judgment, and the time for appeal from
both that judgment and denial of the motions runs from the entry
of the order denying the motions.”

Fiore v. Wash. Cty. Cmty.

Mental Health Ctr., 960 F.2d 229, 234 (1st Cir. 1992); see also
Ofori v. Ruby Tuesday, Inc., 205 F. App’x 851, 852 (1st Cir.
2002) (per curiam) (unpublished opinion) (a Rule 59(e) motion
suspends time for appealing the underlying summary judgment
decision); Tempelman v. U.S. Postal Serv., 981 F.2d 1245 n.2
(1st Cir. 1992) (per curiam) (unpublished opinion) (“Unlike a
Rule 59(e) motion, a Rule 60(b) motion does not toll the time
for appeal or affect the finality of the underlying judgment.”).
The United States contends, however, that finality for
purposes of appeal is not the relevant standard here and,
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instead, urges application of the finality standards deployed in
res judicata analysis (in situations in which it is applied to
the same case, as opposed to use for collateral estoppel
purposes).
I must first observe that, contrary to the United States’
contentions, Rule 59(e) does not simply affect finality as to
appeal.

See generally Fiore, 960 F.2d at 234 (“finality of the

original judgment, and the time for appeal.”) (emphasis added).
Theoretically, even though Hannon did not pursue his claim
in this Court or in the appeal to the First Circuit, once the
United States filed its Rule 59(e) motion, I could have found,
upon reconsideration, that at least some of the money should
have gone to Hannon.

Given the relevant Massachusetts law

governing the priority of distribution from the proceeds of the
undercompensation payment, this would have been unlikely.
However, Hannon was still an interested party with a claim
(however remote or unlikely) to the funds in a non-final case
when he filed for bankruptcy.

And, at least superficially,

Hannon has an argument that the proceeds should be considered
part of his bankruptcy estate.
The capacious definition of “property” belonging to
bankruptcy estates is evidence that “Congress intended a broad
range of property to be included in the [bankruptcy] estate.”
United States v. Whiting Pools, Inc., 462 U.S. 198, 204 (1983).
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Such property is defined as “property, wherever located and by
whomever held,” and includes “all legal or equitable interest of
the debtor in property as of the commencement of the
[bankruptcy] case.”

11 U.S.C. § 541(a).

This definition even

includes property “in which the debtor did not have a possessory
interest at the time the bankruptcy proceedings commenced.”
Whiting Pools, 462 U.S. at 205.
With regard to my previous decision from October 24, 2011,
and its subsequent reversal, the only settled matter is that the
United States did not relinquish its priority in extinguishing
its lien on the underlying real property.

The First Circuit has

directed me to enter summary judgment solely to the effect that
the United States has priority over Manning with respect to the
proceeds.

Were they still the only interested parties, the

answer would be clear.

But the question whether the proceeds

should be brought into the bankruptcy estate was not presented
to me in the proceeding before the appeal.

Consequently, I

approach this issue without giving any kind of preclusive effect
in this case to the First Circuit’s order except as to priority
between Manning and the United States.
With this in mind, I find that the order was not final with
respect to any contention that Hannon or his estate still had a
claim to it.

From this finding, it is a natural conclusion to

say that Hannon’s estate had a “legal interest” in the property
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(the interpleader fund) in this case, and that, as a result, the
Trustee (on behalf of Hannon) has a cognizable claim that the
funds belong in the bankruptcy estate.

However, simply because

Hannon’s estate does indeed have a claim to the funds does not
necessarily mean that that claim is dispositive.

The United

States has advanced several other reasons that the funds should
still be awarded to the government outside of the bankruptcy
proceedings, even assuming that Bankruptcy Code § 541 brings the
property into the estate.
B.

Abandonment or Waiver
The United States contends that Hannon’s conduct during the

interpleader action abandoned or waived his and, by extension,
his bankruptcy estate’s, claim to the proceeds.

Analysis of

this question must be broken down into two parts: the first is
whether Hannon’s claim or interest in the funds could have been
abandoned by his non-participation in later proceedings, and,
the second is whether his filing for bankruptcy had any effect
on his interest in the proceeds.
The logic of the United States’ position is that, if
Hannon’s non-participation in these proceedings effectively
abandoned his claim to the interpleader funds, he had no
interest in or claim to the money to justify incorporating it
into his bankruptcy estate.

It is undisputed that Hannon did

not participate in the interpleader action, presumably because
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he realized that, under the relevant Massachusetts law, the
claims of the creditors were so great as entirely to preclude
any recovery for him from the undercompensation funds.

See

Mass. Gen. Laws ch. 79, §§ 32-33; Collector of Taxes of Boston
v. Revere Bldg., 177 N.E. 577, 577 (Mass. 1931) (“[W]hen
property subject to a mortgage is taken by eminent domain the
mortgagee may become a party to proceedings to assess
compensation therefor[e] and that a separate judgment is to be
entered for such mortgagee for the satisfaction of his mortgage
debt.”).

The tax lien of the United States alone (not even

including Manning) is more than $7 million.

So it was

reasonable for Hannon (or his attorneys) to have thought that
his participation in the action concerning distribution of the
undercompensation proceeds would likely not yield any money for
Hannon’s direct benefit.

The United States contends that,

because Hannon had almost no hope of actually obtaining
undercompensation funds himself, and did not participate in the
proceedings to determine the disbursement thereof, that he
therefore surrendered his claim to the funds, permitting me to
decide to which of his creditors the funds should be paid.
The Trustee’s position on this issue is that, even though
Hannon’s chances of receiving the undercompensation proceeds
were almost nonexistent, and the funds were in a court account,
such proceeds were technically his property until such time as
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one of the creditors was finally and indisputably awarded the
funds.

The argument is that, because the funds were still

disputed at the time Hannon filed for bankruptcy, he technically
had possession of the funds at the time he filed.
argument compelling.

I find this

As discussed above, the judgment with

regard to ultimate disbursement of the funds had still not been
resolved at the time Hannon filed for bankruptcy.

This fact,

combined with the broad definition of what constitutes property
of the estate under § 541 of the Bankruptcy Code, compels me to
find that the proceeds became part of the estate when Hannon
filed for bankruptcy.
The United States argues that, even if the proceeds were
technically part of the estate when Hannon filed, Hannon
abandoned the claim as part of his bankruptcy estate under the
meaning of 11 U.S.C. § 554.

This argument is unpersuasive.

Section 554(a) provides that “[a]fter notice and a hearing,
[the trustee] may abandon any property of the estate that is
burdensome to the estate or that is of inconsequential value and
benefit to the estate.”

11 U.S.C. § 554(a).

Section 554(b)

allows interested parties to request the court to order the
Trustee to do so.

Id. § 554(b).

And Section (d) states that

“[u]nless the court orders otherwise, property of the estate
that is not abandoned under this section and that is not
administered in the case remains property of the estate.”
14

Id. §

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554(d).

Abandonment under § 554 as argued by the United States

thus requires notice and a hearing, and either voluntary
relinquishment on the part of the Trustee or the same ordered by
the Bankruptcy Court.

I am unaware of any such action on the

part of either the Trustee or the Bankruptcy Court.
Consequently, the contention that Hannon’s estate abandoned its
claim to the interpleader funds under § 554 fails.
C.

IRS Levy and Turnover Request
In the first round of briefing, neither party made note of

the May 19, 2010 Notice of Levy issued to the City of Newton by
the IRS with respect to the original parcel of property, and any
attendant rights related to it.

The question is whether the

Trustee’s current challenge to the funds in question constitutes
a wrongful levy challenge under the meaning of Internal Revenue
Code § 7426(a)(1).

Because this issue has proved dispositive in

other proceedings related to this case, I requested that the
parties submit further briefing on this issue.

In this round of

briefing, the United States contends that, although Hannon
himself would have the right to challenge the levy under the
statute, Hannon’s bankruptcy estate Trustee is a separate party
because he is working predominately for the benefit of Hannon’s
creditors, not Hannon himself.
Section 7426(a)(1) of the Internal Revenue Code states:

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(1) Wrongful levy.--If a levy has been made on
property or property has been sold pursuant to a levy,
any person (other than the person against whom is
assessed the tax out of which such levy arose) who
claims an interest in or lien on such property and
that such property was wrongfully levied upon may
bring a civil action against the United States in a
district court of the United States. Such action may
be brought without regard to whether such property has
been surrendered to or sold by the Secretary.
26 U.S.C. § 7426(a)(1).

Essentially, this section provides that

“[w]hen someone other than the taxpayer claims an interest in
property or rights to property which the United States has
levied upon, his exclusive remedy against the United States is a
wrongful levy action under I.R.C. s 7426.”

United Sand & Gravel

Contractors, Inc. v. United States, 624 F.2d 733, 739 (5th Cir.
1980).
There are, however, restrictions on a third party’s right
to bring a wrongful levy action.

The most relevant is that

found in 26 U.S.C. § 6532(c)(1), which at the times relevant to
this matter,1 provided that “no suit or proceeding under section
7426 shall be begun after the expiration of 9 months from the
date of the levy or agreement giving rise to such action.”

This

provision created a nine month statute of limitations for third
parties to bring wrongful levy claims against the government.

1

Effective as of December 21, 2017, the statute of limitations
changed from 9 months to 2 years. See 26 U.S.C. § 6532(c)(1).
This change has no bearing on my analysis, however, as reflected
in the further discussion contained in this Section of this
Memorandum and Order.
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It is this provision of the Code that compelled me to dismiss
the claim of another of Hannon’s creditors, Julie Foshay, who
challenged the government’s claim to the proceeds in what was
essentially a wrongful levy claim.

See Hannon, 2012 WL 4390527,

at *9.
But this limitations period does not apply to the taxpayer
himself, as stated explicitly in § 7426 itself.

The statute

contains a carveout for “the person against whom is assessed the
tax out of which such levy arose,” Internal Revenue Code §
7426(a)(1), for whom the normal course of action of bringing “a
refund suit in district court or a petition to the Tax Court for
a redetermination of the deficiency” remains available.
v. United States, 521 F.2d 56, 60 (9th Cir. 1975).

Shannon

The

government argues that the Trustee should be deemed a third
party like Foshay whose claim would likewise be time-barred.
However, in bankruptcy, “[w]hen a trustee is appointed, the
trustee ‘steps into the shoes of the debtor for the purposes of
asserting or maintaining the debtor’s causes of actions[].’”
DiMaio Family Pizza & Luncheonette, Inc. v. Charter Oak Fire
Ins. Co., 448 F.3d 460, 463 (1st Cir. 2006) (quoting In re Rare
Coin Galleries, Inc., 862 F.2d 896, 901 (1st Cir. 1988)).
Applying this foundational principle of bankruptcy law, it is
clear that the Trustee’s maintenance of Hannon’s interest in or
claim to the interpleader fund mirrors whatever interest in or
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claim to the fund Hannon had before he filed for bankruptcy.

As

a result, application of § 7426 is inappropriate, and the
Trustee’s claim is not barred by it.
D.

The Relevance of Conversion from Chapter 11 to Chapter 7
In a Chapter 7 liquidation case, the Trustee is bound by

the mandatory distribution scheme found in 11 U.S.C. §§ 724 and
726.

See 11 U.S.C. § 724 (“Property in which the estate has an

interest and that is subject to a lien that is not avoidable
under this title . . . shall be distributed . . .”).

The

parties argue over the meaning of the conversion of the
bankruptcy estate from Chapter 11 bankruptcy to Chapter 7
bankruptcy and whether Chapter 7’s mandatory distribution scheme
is applicable to the interpleader funds.

For his part, the

Trustee contends that the conversion to Chapter 7 bankruptcy
means that the distribution of the interpleader funds must go
through the Trustee himself in accordance with the Bankruptcy
Code.
The response from the United States is two-fold.

The

United States argues first that the proceeds at issue here are
not part of the bankruptcy estate, and therefore the Bankruptcy
Code statutes are not applicable.
argument.

See supra Section II.B.

I have rejected that
The United States also

contends that the statutes are inapplicable because of the

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timing of the grant of relief from automatic stay and the
conversion to Chapter 7 bankruptcy.
The timing argument in the United States’ briefing is based
on case law standing for the general proposition that the
determination of rights in an interpleader fund is based on the
rights of the claimant at the time the action was initiated.
See Texaco, Inc. v. Ponsoldt, 118 F.3d 1367, 1370 (9th Cir.
1997); White v. F.D.I.C., 19 F.3d 249, 252 (5th Cir. 1994);
Avant Petroleum, Inc. v. Banque Paribas, 853 F.2d 140, 143 (2d
Cir. 1988).

But that proposition does not speak directly to the

question here, which is not about who has superior rights in the
fund — a matter already determined by the First Circuit.
The Trustee does not dispute that the United States would
be entitled to payment of the proceeds “but for” the conversion
to Chapter 7.

Nor does the United States dispute that the

penalty portions of the tax liens can be avoided as to property
of the bankruptcy estate.

Therefore, the only issue regarding

the conversion is whether the Bankruptcy Court’s decision to
lift the automatic stay somehow waived the necessity of
complying with the relevant portions of the Bankruptcy Code such
that I may directly exercise the authority to distribute the
funds.
As a consequence, I must consider the Bankruptcy Court’s
intent in allowing the conversion of Hannon’s bankruptcy from
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Chapter 11 to Chapter 7 and lifting the automatic stay.

The

very fact that debtors may convert from Chapter 11 to Chapter 7
bankruptcy seems to me to support the fact that once the
conversion to Chapter 7 takes place, its statutory scheme,
including with regard to distribution, should govern.
Conversion to Chapter 7 means that the Trustee has the better of
the argument, and distribution should in the ordinary course go
through the Bankruptcy Court according to bankruptcy procedures.
More ambiguous, perhaps, is the fact that the Bankruptcy
Court lifted the automatic stay, but it did not use the United
States’ proposed language in issuing its order before it then
went on to allow the conversion from Chapter 11 to Chapter 7
bankruptcy.

Nevertheless, taken together, the actions by the

Bankruptcy Court seem2 to have indicated that it was for me and
ultimately the First Circuit to determine priority of rights,
but that distribution should still follow the procedure set out
in Chapter 7.
E.

Lifting of the Automatic Stay
Were there no further issues to analyze, my determination

would be that, due to the all-encompassing nature of § 541 of
the Bankruptcy Code, the interpleader fund would be part of

2

I note that Judge Hillman, who granted the motion to lift the
stay, has since retired and consequently a reference for
clarification by the Bankruptcy Judge who acted on the motion is
not an option.
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Hannon’s bankruptcy estate.

However, there remains the issue of

ambiguity to the Bankruptcy Court’s grant of relief from the
automatic stay in Hannon’s bankruptcy case.
The practical basis upon which the Trustee has the power to
influence resolution of a case, such as this, outside of the
Bankruptcy Court, is operation of the automatic stay.

The

automatic stay found in 11 U.S.C. § 362(a) applies to the
commencement of a bankruptcy case.

At the time the case is

filed, the stay operates to halt “the commencement or
continuation . . . of a judicial . . . proceeding against the
debtor that was or could have been commenced before the
commencement of the [bankruptcy] case . . . or to recover a
claim against the debtor that arose before the commencement of
the [bankruptcy] case . . . [or] any act to obtain possession of
property of the estate . . . [or] any act to . . . enforce any
lien against property of the estate.”

11 U.S.C. § 362(a).

This automatic stay is a “familiar bedrock of bankruptcy
law,” giving a debtor “breathing room” from his creditors.
Soto-Rios v. Banco Popular de P.R., 662 F.3d 112, 116 (1st Cir.
2011).

“It is designed to effect an immediate freeze of the

status quo by precluding and nullifying post-petition actions,
judicial or nonjudicial, in nonbankruptcy fora against the
debtor or affecting the property of the estate.”

Hillis Motors,

Inc. v. Haw. Auto. Dealers’ Ass’n, 997 F.2d 581, 585 (9th Cir.
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1993) (citing Interstate Commerce Comm’n v. Holmes Transp.,
Inc., 931 F.2d 984, 987 (1st Cir. 1991)).
But there is some flexibility to work around this automatic
action.

Section 362(d)(2) provides that,

On request of a party in interest and after notice and
a hearing, the court shall grant relief from the stay
provided under subsection (a) of this section, such as
by terminating, annulling, modifying, or conditioning
such stay . . . with respect to a stay of an act
against property under subsection (a) of this section
. . .
11 U.S.C. § 362(d)(2).
The purpose of Section 362’s automatic stay is
to protect the debtor from an uncontrollable scramble
for its assets in a number of uncoordinated
proceedings in different courts, to preclude one
creditor from pursuing a remedy to the disadvantage of
other creditors, and to provide the debtor . . . with
a reasonable respite from protracted litigation,
during which they may have an opportunity to formulate
a plan of reorganization for the debtor.
A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 998 (4th Cir.
1986) (citing Matter of Holtkamp, 669 F.2d 505, 508 (7th Cir.
1982)).

This allows the debtor to take some time to understand

the extent of his property in order to effectuate an efficient
reorganization or (in the case of Chapter 7) liquidation.
Section 362(d) allows the Bankruptcy Court to lift the stay as
to certain outside proceedings if the court determines that the
estate would best be served by allowing those proceedings to
continue outside of bankruptcy.

“When a bankruptcy court lifts,

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or modifies, the automatic stay, it merely removes or modifies
the injunction prohibiting collection actions against the debtor
or the debtor’s property . . .

‘Relief from an automatic stay

entitles the creditor to realize its security interest . . . [or
other interest] in the property . . .’”

Catalano v. C.I.R., 279

F.3d 682, 686 (9th Cir. 2002) (quoting Nebel v. Richardson (In
re Nebel), 175 B.R. 306, 312 (Bankr. Neb. 1994)).
Unaware of Hannon’s bankruptcy case, on September 24, 2012,
I issued an order denying the United States’ timely motion for
reconsideration of the order granting summary judgment to
Manning as to the priority of the respective parties’ claims to
the interpleader funds.
automatic stay.

This order technically violated the

In order to preserve the validity of my

September 24 order so as to provide a procedurally correct
appeal, and in an attempt fully to resolve the issue of the
interpleader funds outside of the Bankruptcy Court with the
Bankruptcy Court’s blessing, the United States filed a motion in
the Bankruptcy Court pursuant to § 362(d) to lift the automatic
stay as applied to the interpleader funds.

This motion

requested that the Bankruptcy Court “permit the United States to
appeal the District Court’s adverse judgment in the Interpleader
Action and to collect an appropriate portion of the Interpleader
Fund, or, alternatively, an Order declaring that the automatic
stay does not apply.”

Rather than adopting the proposed order
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Judge Hillman endorsed the motion as “Granted” without further
explanation.

See No. 12-bk-13862, Dkt. No. 164 (Bankr. Mass.

Oct. 30, 2012).
This ruling cannot, without speculation, be read to mean
that Judge Hillman effectively adopted the proposed order of the
United States submitted with the motion to annul the stay.

That

proposed order reads:
The Creditor United States’ Motion to Annul the
Automatic Stay to Allow Continued Proceedings in
Pending Interpleader Action is GRANTED.
The automatic stay is hereby annulled for the
purpose of allowing the continuation of the
proceedings in Patrick J. Hannon v. City of Newton et
al., Case No. 1:11-cv-10021, U.S. District Court,
District of Massachusetts, including a possible appeal
by the United States of the District Court’s judgment
and distribution of funds in accordance with any final
judgment entered by the District Court.
Proposed Order to Annul the Automatic Stay, No. 12-bk-13862,
Dkt. No. 131, Ex. 13 (Bankr. Mass. Oct. 3, 2012) (emphasis
added).

The proposed order was quite broadly phrased and it

encompassed all of the eventualities that have come to pass.
The language of the proposed order purports to include any
potential final judgment this court would issue in the instant
case, and to lift the stay as to any final disbursement of the
interpleader funds.

But, of course, Judge Hillman did not adopt

this proposed order.
The interpleader fund would normally be considered property
of the estate under the broad definition of § 541.
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And, if it

Case 1:11-cv-10021-DPW Document 89 Filed 05/11/18 Page 25 of 25

were brought into bankruptcy proceedings and made property of
the estate, the distribution scheme required under §§ 724 and
726 of the Bankruptcy Code would be applicable, as urged by the
Trustee.

Despite the possibility that the bare endorsement

granting annulment of the stay might be read to permit me to
maintain control over the interpleader funds to be distributed
as mandated by the First Circuit, I decline to embrace that
reading.

Under the circumstances, the more prudent course is to

leave the question of distribution in the first instance to the
bankruptcy court where the United States may pursue its claim
over the funds in question to the conclusion of relevant
proceedings.
III. CONCLUSION
For the reasons stated above, I hereby ALLOW the Trustee’s
Motion (#72) and hereby order that the interpleader fund be
distributed to the Trustee as property of the Hannon estate in
the Chapter 7 proceedings now approaching conclusion in the
Bankruptcy Court.

The Clerk is directed upon final judgment

directing this distribution of the interpleader fund to close
this case in this court.

/s/ Douglas P. Woodlock_________
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE

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