What Keeps Me Busy

empty chairsThe number of new cases through my doors is down, just like it is everywhere.

But I’m staying busy.   Busier some days than I would like to be.

I thought it might be fun to look at the change in the composition of my cases over the past two years.

More complicated cases

There don’t seem to be any simple cases anymore.  Debtors who have managed to avoid filing bankruptcy til this late in the Great Recession don’t lead simple lives.  Their issues are more complicated, the competing interests are stronger.

Complex cases take more of my time and support a larger fee.

Bankruptcy litigation

I’ve just completed the liability phase of a nondischargeability case, defending a debtor from charges that his moonlighting in the same field as his employer created a non dischargeable debt.

While bankruptcy litigation is down along with filings, there always seem to be more need for good bankruptcy trial lawyers than there is supply.

There are certainly more discharge violations than are ever enforced for the benefit of our clients.  Go on, make that discharge mean something.

Mortgage servicing complaints

For all the attention that mortgage servicing has gotten lately, it doesn’t seem to have gotten any better.  I’m finding that in or out of bankruptcy, homeowners have issues with the servicing on their loans.

And, praise be, we have some new tools to help homeowners in the beefed up procedures for getting information from the servicers.

I’m just getting back the first wave of responses to my requests for information on behalf of clients.  It remains to be seen whether the fixes will be administrative or litigation driven.

It’s clear to me that there is a need for accountability in the servicing world.

Bankruptcy intersects family law

The family law bar feeds me cases as fast as I can digest them.  Most families are fairly financially precarious when intact.  The same income can seldom support two separate households.  Bankruptcy can at least start the former spouses out with less economic baggage.

Yesterday’s new case involved the rights of a family lawyer against the other spouse in that spouse’s bankruptcy case.  The family court awarded the lawyers a lien on the community’s share of a partnership holding a commercial building.  My task will be to figure out the extent which that lien is enforceable in a Chapter 7 case.

Housekeeping deferred

So far, my days have been busy without resorting to cleaning my office or updating my client handouts.

How about you?  What’s keeping you busy?

 

Image courtesy of Flickr and John Haslam.

Bankruptcy Sales Free And Clear

Bankruptcy sales

Now that the real estate market in my area is improving, we are dusting off another of our little used skills to effect sales of property during a Chapter 13:  the sale free and clear of liens.

The ability to sell property subject to disputes and continue the fight over a bank account, rather than a piece of property, is one of the real treasures in the Bankruptcy Code.

A sale free and clear transfers the disputed lien or interest from the property to the proceeds of the sale.  The order typically provides that the lien on the proceeds has the same validity and extent as the lien had when it attached to the real estate.

The seller can deliver clear title to a buyer, and the parties can work out or litigate the rights to the proceeds thereafter.

Let’s look at how it works, and flag some of the potholes you can fall in along the way.

Meet §363(f)

The governing subsection is found in Chapter 3 of the Code, thus it applies to sales in bankruptcy cases under any chapter.  So, while it speaks of the power of the “trustee” to sell property, a Chapter 13 debtor may invoke it as well.

Five alternative bases for a sale free and clear appear:

  1. Applicable non bankruptcy law permits sale free and clear
  2. The entity affected consents
  3. The interest is a lien and the value of the property is greater than the total of all liens
  4. The interest is disputed
  5. The holder of the interest could be compelled to accept a money judgment in satisfaction.

We’ll assume for ease of discussion that the interest we are selling free and clear of is a disputed lien, which is the most common scenario in my experience.  And, like anything associated with bankruptcy procedure, I’ll tell you how it works where I practice. Your mileage may vary.

Sale versus Sale Free and Clear

Be clear that getting an order to sell property free and clear of a particular lien doesn’t excuse you from complying with the usual procedures to sell property of the estate.

The creditors are entitled to notice of the sale, with the particulars of the price and the proposed disposition of the proceeds.  General creditors get 21 days notice of the proposed sale.  The real estate professionals may need to have their engagement approved by the court.

Motion to Sell Free and Clear

The motion directed at the disputed lien is a contested matter, directed at a particular entity.  Check out the bankruptcy rules for contested matters for the notice required to be given and the manner of service. FRBP 9014.

Note that moving papers in contested matters must be served in the same manner as adversary proceedings.  FRBP 9014(b). Serve the right folks just as though the motion was a complaint (FRBP 7004) , or you’ll find yourself redfaced or worse at the hearing.

Absent an order shortening time, our local rules provide 28 days notice to the target creditor of your intent to convey the property without full payment of the lien.

The motion papers have to establish that the lien or interest in question is one to which the statute applies. Be clear about which of the statutory bases for the sale apply.

Typically, the order granting the motion will specify

  • how much money will be held back, subject to the disputed lien; 100% or some larger increment
  • who will hold the money
  • whether a separate interest bearing account is required
  • any time limits within which an adversary proceeding for a determination on the merits must be filed

Be mindful of FRBP 6004 which provides that any order authorizing the sale of property is automatically stayed for 14 days.

Close the deal

Most real estate transactions come with timelines.  Trouble results when the client and/or the real estate agents craft the deal without involving bankruptcy counsel.

Your role, in a perfect world, will be to identify up front the need for a motion to sell free and clear, and to educate all concerned about the requirements of a bankruptcy sale.  Particularly, make sure that closing is scheduled for after the sale order becomes final, not just after that order is issued.

The player in a sale transaction too often forgotten, to the parties’ later chagrin, is the title insurer.  The joke in our office and in our bankruptcy courtrooms is that the world is really run by title companies.  No matter how right and tight your legal procedures are, if the title company won’t issue title insurance, your transaction is not going to close.

Get the title company involved early with the issues and the timelines.  Draft the proposed order authorizing sale free and clear early and solicit comments and approval, in advance, from the title insurer, to the form of the order.

Then, while everyone else is patting themselves on the back for having closed the sale, you can retreat to your office to file the adversary to determine who, in the end, gets the money now impressed with the disputed lien.

Image courtesy of Flickr and Dan Moyle.

 

The Hazards Of Self Employment In Chapter 7

896429958_6b49a68f2d_zWhy would a Chapter 7 trustee shut down a proprietorship business with no value?

That question comes up again and again from newish bankruptcy lawyers who can’t imagine that a trustee would demand the closing of the debtor’s business.

After all, goes the argument, the debtor needs to make a living and the business has no non-exempt value.

The trustee’s  insistance on closing the business is more understandable when you hear this nightmare.

The postman, the pit bull and the priority claim

Our Chapter 11 debtor had a rental property leased to a tenant with a pair of large dogs.  During the pendency of the case, the dogs bit the postman.

The postman sued the debtor in possession along with the tenant on the grounds that the owner was liable for injury incurred on the property.

Assuming a verdict in favor of the postman, not only is the bankruptcy estate liable, but the claim is a cost of administration, payable ahead of the prepetition creditors.

Not a good state of affairs for the debtor in possession who is supposed to be operating as a fiduciary for his creditors.

Granted, I don’t know if the estate was adequately insured nor how liability was allocated among the defendants in the dog bite case.

I do know, from representing a creditor in the case upon conversion to Chapter 7, that there was far too little money in the estate to make a dent in the claims of prepetition creditors, even before an administrative tort claim.

Proprietorships in Chapter 7

Apply the lessons of that premises liability case to your typical, self employed debtor.

Let’s assume the debtor is a hairdresser whose only business assets is a market rate lease on a beauty shop, and her tools of the trade.

Consider the liability of the estate should the trustee permit continued operation of the shop.  A customer trips over the debtor’s pet Chihuahua, who accompanies the debtor to work each day, and cracks her head in the fall.

Or, the customer suffers an adverse reaction to hair products.

One can well imagine that the bankruptcy trustee, the nominal owner of the business and its assets upon filing of the Chapter 7, will be named as a defendant in the resulting suit.

And if the suit is successful, the judgment becomes an expense of administration, with priority equal to the trustee’s commission, and ahead of the prepetition creditors.

No Chapter 7 trustee wants to have to explain that state of affairs to his boss or to the creditors.

Incorporate or file Chapter 13

My rule in situations where the prospective debtor has a proprietorship that she wants to continue to operate is simple:

Either incorporate the business in advance of filing Chapter 7 or file Chapter 13.

In Chapter 13, the continued operation of the debtor’s business is expressly authorized.  The debtor can continue to make a living and get a discharge of debts at plan completion.

 Image courtesy Flickr and Darwin Bell

Cautionary Tale re Bankruptcy, Attorneys and Notice

bankruptcy noticeHow often has your bankruptcy client presented you with a copy of a complaint or an abstract of judgment for inclusion in their list of creditors?

On the face of the pleading, you have the name and mailing address of the creditor’s lawyer.

But is that good enough for a bankruptcy discharge?

A recent case from the 9th Circuit has caused me to reconsider.

Notice to former lawyer inadequate

The debtor lost an arbitration that alleged securities fraud.  When it came to filing Chapter 7 three years later, he listed the address of the creditor’s attorney in his schedules, rather than the name of the creditor, Fiero.

Here’s where it gets tricky:  the lawyer still represented Fiero, in other matters, but not the one leading to the arbitration award.

The lawyer represented other creditors listed in the debtor’s case, and even brought a non dischargeability action against the debtor for the other creditor.

Despite having actual knowledge of the bankruptcy case, the lawyer didn’t relay information about the filing to Fiero.

Held:  the lawyer who represented Fiero in the arbitration was no longer Fiero’s agent, for the purposes of receiving notice of the bankruptcy.  Perle v. Fiero

In the absence of effective notice of the bankruptcy, a non dischargeability action filed four years later was timely.  And later, successful under §523(a)(6).

Notice, notice, who gets the notice

The obvious answer is that notice of a bankruptcy filing should go to the creditor itself.

That’s simple and perhaps not very useful to a bankruptcy practitioner.

Think about the car accident where your client might never have had the mailing address of the other party.

When there’s a question about whether the claim falls into one of the “bad behavior” exceptions to the discharge, you have choices.  Or rather, parallel lines of attack.

First, you and/or your client need to make serious efforts to find a good address.  Consider noticing every “Victor Victim” in the county, or listed in the motor vehicle records.  When the court pays for sending out the notice, there should be no reluctance to over notice.

Second, your client needs to be apprised of the risk that notice only to litigation counsel may not be adequate.

My representation agreement expressly discusses the issue of notice:  we agree to assist in finding good addresses, but where we try to fill in sketchy information from the client, the client assumes the consequences of bad notice.

Thankfully, the provision has never been tested, but it should serve to alert the client that the matter of a good address is a big deal.

Then again:  if you are a state court litigator, consider when your representation ends?  Do you remain counsel of record after entry of a judgment?  Doubtless, state law differs.  Figure it out so you don’t find yourself on the reverse side of the Perle decision:  agent for a client with whom you have no current contact.

Image courtesy of Nemo and Pixabay.

Marital Adjustment: Everything But The Kitchen Sink

kitchen sinkNot every expenditure that benefits the debtor’s household or his family is a household expense.

And, if it’s not a household expense, it doesn’t get added to CMI in a single spouse bankruptcy filing.

That’s how the marital adjustment should work.

But it’s not so simple.

Household expense is not an expansive definition

After last week’s NACBA presentation on challenges where only one spouse files, I wondered why I hadn’t seen what my co panelist Billy Brewer made so clear.billy brewer

When only one spouse files bankruptcy, current monthly income includes only that part of the non filer’s income contributed to household expenses.

With his inimitable drawl, he drew a distinction between expenses associated with running the house, and expenses incurred for the benefit of the family.  The later, he argued, are not household expenses.

Brewer successfully argued to the bankruptcy court and the district court on appeal in Gregory, that “household expenses” were confined to the expenditures on operating the family’s principal residence.  The costs of fixing up a second property for sale were not expenses of the household, even though the marital community would benefit from the sale.

Ms. Gregory cites to the Fourth Circuit’s opinion in In re McGreevy, in which the court defined a similar term, “household goods,” as “those items of personal property that are typically found in or around the home and used by the debtor or his dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself.” 955 F.2d 957, 961-62 (4th Cir. 1992). By analogy, she argues that the expenditures made by her husband on their former residence during the six months prior to filing for bankruptcy were “for purposes of making the house more `sellable’,” and did not enhance the day-to-day living of the household. Lacking a “functional nexus” to the household, Ms. Gregory concludes that her husband’s expenses were not household expenses, and were properly excluded from the bankruptcy court’s section 707(b)(2) presumption of abuse analysis.

Deducting non filer’s personal expenditures not as advantageous

When BAPCPA was first enacted, I was on an early seminar panel on the means test.  My co presenters, Doug Jacobs and now judge Fredrick Clement and I debated how the marital adjustment was to be applied.

One approach was to toss all of the non filer’s income into the CMI pot, and then deduct out those expenses of the non filer that did not support the debtor or the debtor’s dependents.  That requires that you identify the things the non filer spends his or her income on that aren’t household expenses.

The assumption underlying the “all in” approach is that if it isn’t an identifiable expense attributable to the non filer, it’s being spent on the household expenses of the debtor and the debtor’s dependents.

Exclude everything except household expenditures

The alternative approach involves excluding all of the non filer’s income except the amounts spent on running the household.  And household here focuses on the operation of the house.

In this approach, not everything that benefits the family supports day to day living within the home, the standard adopted in Gregory.

Prove it

Brewer addresses the evidentiary problem by having the prospective debtor and the non filer establish three bank accounts.  Each spouse’s wages go into a separate account, and each contributes from their wage account an amount to the third account for the operation of the household.

Payments from that third account define the household expenses.

Our panel concurred that you probably have to have this arrangement in place for the means test look back period.

Another issue related to problems of proof has to do with credit card usage and debt service.  As debtor’s attorney, you need to know whether credit cards are being used in this period for household expenses or not.  Further, you need to filter out amounts paid on credit cards as debt service on prior expenditures.

I’m changing my approach to this issue based on what I learned at the NACBA convention.

Phantom Creditors In Bankruptcy

854788322_9f715316d3_zIn rem is nifty sounding Latin, the original language of lawyering.

It’s defined as an action “against a thing”.  It  concerns the property, rather than the person.

In bankruptcy we encounter it most often when a creditor seeks relief from stay in rem.  Generally, the creditor  seeks to make the ordered relief follow the “thing”.   It comes up when the property has been transferred from hand to hand, each new hand filing bankruptcy to get the stay.

But more generally, looking at the client’s holdings, in rem, reminds us that “creditor” includes entities with rights in the debtor’s property, even in the absence of personal liability.

Section 506 gets wordy as it describes a secured claim.  It is one where the creditor has rights in the debtor’s interest in property.  Note it doesn’t speak at all about personal liability.

And that’s where our clients can get hung up in providing the information necessary to prepare accurate schedules:   they think only in terms of  debts they are liable for.  They miss that bankruptcy deals with debts their property is liable for as well.

In rem in the real world

Secured claims for which the debtor had no liability popped up in my practice lately when the debtor had been deeded an interest in a home already subject to a mortgage lien.

The client had not signed the note nor the deed of trust that secured it.  Yet the obligation encumbered the client’s interest in the home, and thus had to be added to the list of secured claims in the case.

Expand your client interview

We’ve talked before about language-induced misunderstandings between client and lawyer.  Make sure you have questions and phrases that will flush out any secured claims for which the client isn’t liable.

 

Image courtesy of Flickr and Sebastia Giralt.

Can You Tell A Lien From A Secured Claim?

288925731_b025652e66_zThe underwater second deed of trust was listed on Schedule F in the debtor’s prior Chapter 13 case as an unsecured claim.

Functionally, the lien was without value.

But, the debtor, now my client in a subsequent case, took a gentle tongue lashing from a bankruptcy judge about the classification of the claim on the schedules.

The debtor was complaining that the lien hadn’t been stripped in the previous case, as he expected.

The judge saw the scheduling choice as an indication that the debtor wasn’t paying attention in his prior case.

I saw it, more probably, as a case of a confused bankruptcy lawyer. The prior lawyer saw an absolutely underwater mortgage, and gave it the practical, rather than the formal, treatment it should have.

[I also saw the issue as the sort of question  that a layman cannot be expected to know.]

So, let’s walk through the differences between liens and allowed, secured claims.

Liens

We’re lucky:  “lien” is defined in the code.

§101 (37) The term “lien” means charge against or interest in property to secure payment of a debt or performance of an obligation.

So, a lien is the right in property associated with an obligation.  The definition says nothing about the value of the lien.

Secured Claims

Schedule D asks for a list of secured creditors.  The instructions begin

State the name, mailing address … and last four digits of any account number of all entities holding claims secured by property of the debtor as of the date of filing of the petition.

The face amount of the claim secured by the lien is listed with the other info about the lien.  Tellingly, the last column of information on the lien is the amount of the claim that is unsecured.

Only at end of the info required about the secured claim are we asked whether there’s any real value to actually secure the claim.

Classification of the claim, then, is dependent on the existence of a legal right against something the debtor owns, even if the lien is so far down the line of claimants to the collateral as to be worthless.

So we know where to list the claim.

Allowed secured claim

The meaningful sorting, the division of apples from oranges, begins when we talk about valuing secured claims.

Section 506 provides us with the definition of an allowed secured claim.  Now, we start talking about practicalities.

(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest… is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property… and is an unsecured claim to the extent that the value of such creditor’s interest …is less than the amount of such allowed claim.

So, the holder of the underwater junior lien on my client’s house had a lien, but not an allowed secured claim.  The value of the collateral was less than the senior liens.  The junior’s mortgage lien entitled it to nothing on account of the lien.

Got it?

Image courtesy of Flickr and Dan McKay