Karamoussayan v. Mass. Dep't of Revenue (In re Karamoussayan)

658 B.R. 221

Serge Ohannes KARAMOUSSAYAN, Debtor.

Serge Ohannes Karamoussayan, Appellant, v. Massachusetts Department of Revenue, Appellee.

BAP NO. MB 22-041

Bankruptcy Case No. 22-11302-JEB

United States Bankruptcy Appellate Panel of the First Circuit

April 11, 2024

Appeal from the United States Bankruptcy Court for the District of Massachusetts, (Janet E. Bostwick, U.S. Bankruptcy Judge)

David G. Baker, Esq., Boston, MA, on brief for Appellant.

Stephen G. Murphy, Esq., on brief for Appellee.

Before Finkle, Chief U.S. Bankruptcy Appellate Panel Judge. Harwood and González, U.S. Bankruptcy Appellate Panel Judges.

Finkle, Chief U.S. Bankruptcy Appellate Panel Judge.

This appeal arises from the bankruptcy court's order overruling the objection filed by Serge Ohannes Karamoussayan (the "Debtor") to the proof of claim filed by the Massachusetts Department of Revenue (the "MDOR"). Because the Debtor lost standing to appeal the order when his chapter 13 case was converted to one under chapter 7, we DISMISS this appeal for lack of jurisdiction.

BACKGROUND¹

The Debtor, who owned and operated a jewelry business in Boston, Massachusetts, filed a chapter 13 bankruptcy petition in September 2022. The Debtor's bankruptcy schedules reflected that he co-owned real property valued at $875,000 (the "Property") and that his interest in the Property was worth $437,500. His other assets consisted of $17,975 in personal property.

I. Order Overruling Debtor's Objection to MDOR's Proof of Claim

The MDOR filed a proof of claim for unpaid taxes in the total amount of $24,031 (the "MDOR Claim"), consisting of a $14,933 secured claim (the "Secured Tax Claim"), an $8,370 priority unsecured claim, and a $726 general unsecured claim. The Debtor objected to the MDOR Claim (the "Claim Objection"), challenging the MDOR's classification of the Secured Tax Claim as secured. He did not, however, dispute the validity or amount of the debt underlying the Secured Tax Claim. In response, the MDOR explained that the debt was secured by statutory tax liens on all the Debtor's assets and that, based on the Debtor's asserted value of his assets, the Secured Tax Claim was fully secured under § 506(a). Therefore, the MDOR contended, it held an allowed secured claim in the amount of $14,933.

At a non-evidentiary hearing on the Claim Objection, the bankruptcy court issued a preliminary ruling from the bench as follows:

I'm satisfied by what was filed in response [to the Claim Objection] that the Commonwealth holds a lien. To the extent there is value in the assets of the Debtor, a portion of it's secured by the residen[c]e, a portion of it is secured by the [other assets] . . . . [I]t is a secured lien.

. . . I believe that the Commonwealth has provide[d] sufficient detail in response.

And so based on that I would overrule the objection. I believe the response by the Commonwealth has given the Debtor whatever information is needed.

After the Debtor's counsel declined to offer any further substantive argument in support of the Claim Objection, the court then ruled: "[T]he Debtor asked that the Court determine whether it was secured and priority and the Debtor's offered nothing to show that it wasn't a secured claim and a priority claim . . . . I will overrule the objection."

After the hearing, the bankruptcy court entered an order overruling the Claim Objection (the "Order"). This appeal followed.

II. Conversion to Chapter 7 and Other Subsequent Events

In March 2023, while this appeal was pending, the bankruptcy court entered an order converting the Debtor's chapter 13 case to one under chapter 7 for cause under § 1307(c).² After the conversion, a chapter 7 trustee was appointed; he did not seek to be substituted as the appellant in this appeal. In August 2023, the court issued a notice indicating there might be sufficient funds to pay unsecured creditors a dividend and directing creditors seeking a distribution to file a proof of claim by November 15, 2023. Prior to the expiration of the deadline, nine claims totaling more than $1,111,000 were filed, including: (1) the MDOR Claim; (2) a $524,073 secured claim filed by U.S. Bank, N.A. ("U.S. Bank"), as the holder of a first priority mortgage lien on the Property; and (3) a $2,757 priority unsecured claim filed by the Internal Revenue Service (the "IRS").

In July 2023, the Debtor filed Amended Schedules A/B and C. On his Amended Schedule A/B, the Debtor listed his 50% interest in the Property, worth $437,500, and personal property valued at $65,012. On his Amended Schedule C, the Debtor claimed a $250,000 homestead exemption and $12,450 in personal property exemptions. The Debtor filed another Amended Schedule A/B on January 25, 2024, listing the same assets, but reducing the value of his business inventory from $12,500 to $985, leaving the estate with about $43,000 in nonexempt personal property assets (the "Nonexempt Assets").³

In November 2023, the bankruptcy court granted U.S. Bank relief from the automatic stay to foreclose its mortgage on the Property and apply any sale proceeds "to the loan balance secured by such mortgage."⁴

III. Supplemental Briefing on Appellate Standing

After the parties filed their principal briefs, the Panel directed them to file supplemental briefs addressing whether the Debtor, as a chapter 7 debtor, has standing to appeal the Order.

In his supplemental brief, the Debtor argues he has standing to appeal because the court's determination that the MDOR Claim is partially secured by tax liens on the Property negatively impacts his pecuniary interests. The Debtor contends that because there is equity in the Property, he would be entitled to recover his 50% share of that equity—up to $250,000—on account of his homestead exemption if U.S. Bank were to foreclose its mortgage and sell the Property. Thus, he asserts, because all valid liens against the Property (including the MDOR's $14,933 tax lien) would have to be paid before he would receive his share of the equity, he would receive $14,933 more of the sales proceeds if it were determined the MDOR did not have a valid tax lien.

The MDOR counters that the Debtor lacks appellate standing as a chapter 7 debtor because he cannot demonstrate that reversal of the challenged order would either result in a surplus that would revert to him or would affect his discharge. The MDOR emphasizes that because the Debtor only challenged the secured status of its claim, and not its validity, reversal would not result in a surplus because the Secured Tax Claim must first be paid whether it is a secured, priority unsecured, or general unsecured claim. The MDOR also argues that the Order does not adversely affect the Debtor's discharge, because Massachusetts sales tax debts are categorically excepted from discharge, regardless of whether they are secured or unsecured.

APPELLATE STANDING

"Standing is a jurisdictional element which cannot be waived and can be raised at any time." Cundiff v. Cundiff (In re Cundiff), 227 B.R. 476, 478 (B.A.P. 6th Cir. 1998) (citation omitted); see also Great Rd. Serv. Ctr., Inc. v. Golden (In re Great Rd. Serv. Ctr., Inc.), 304 B.R. 547, 550 (B.A.P. 1st Cir. 2004) ("[Q]uestions of standing must be considered sua sponte, as it is akin to subject matter jurisdiction.") (citation and internal quotation marks omitted). If the appellant lacks standing to bring an appeal, then the Panel lacks jurisdiction to decide it upon its merits. Zambrana Arroyo v. Scotiabank de P.R. (In re Zambrana Arroyo), 489 B.R. 486, 488 (B.A.P. 1st Cir. 2013) (citing United States v. AVX Corp., 962 F.2d 108, 113 (1st Cir. 1992)). Because the Debtor's bankruptcy case was converted to one under chapter 7 while this appeal was pending, we must consider whether the Debtor has been divested of standing to appeal the Order, depriving us of jurisdiction to review the Order.

I. The Standard for Determining Appellate Standing

A. "Person Aggrieved" Standard

It is well-settled in the First Circuit that only a "person aggrieved" has standing to appeal from a final bankruptcy court order. Neira Rivera v. Scotiabank de P.R. (In re Neira Rivera), 14 F.4th 60, 66 (1st Cir. 2021) (quoting Spenlinhauer v. O'Donnell, 261 F.3d 113, 117 (1st Cir. 2001)).⁵ "A litigant qualifies as a 'person aggrieved' only if the challenged order 'directly and adversely' affects his or her pecuniary interests." Id. (quoting Spenlinhauer, 261 F.3d at 117-18). "Thus, a party asserting standing must demonstrate that the bankruptcy court's order either diminishes his property, increases his burdens, or detrimentally affects his rights." In re Zambrana Arroyo, 489 B.R. at 488 (citations omitted). "To be directly affected by the order, the appellant's pecuniary interests . . . cannot be merely contingent or speculative." Encanto Rests., Inc. v. Aquino Vidal (In re Cousins Int'l Food, Corp.), 565 B.R. 450, 459 (B.A.P. 1st Cir. 2017); see also Orion Fitness Grp., LLC v. River Valley Fitness One Ltd. P'ship, No. Civ. 03-474-JD, 2004 WL 524430, at *1 (D.N.H. Mar. 17, 2004) (citing Davis v. Cox, 356 F.3d 76, 93 n.15 (1st Cir. 2004); Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737, 742-43 (3d Cir. 1995); In re El San Juan Hotel, 809 F.2d 151, 154-55 (1st Cir. 1987)); Gentile v. DeGiacomo (In re Gentile), 492 B.R. 580, 585 (B.A.P. 1st Cir. 2013) (rejecting debtors' assertion of standing based on "a likely, [but] still contingent, pecuniary interest") (citations and internal quotation marks omitted).

B. Standing for Chapter 7 Debtors

In chapter 7 cases, " 'normally it is the trustee alone, as distinguished from the chapter 7 debtor, who possesses standing to appeal from bankruptcy orders' affecting the property of the estate." In re Neira Rivera, 14 F.4th at 66 (quoting Spenlinhauer, 261 F.3d at 118) (other citation omitted). "The advent of the chapter 7 estate and the appointment of the chapter 7 trustee divest the chapter 7 debtor of all right, title and interest in nonexempt property of the estate at the...