Corporate Bankruptcy: So We Can Start Over

5304492399_805a329467_zThou shalt not file bankruptcy for a corporation.

It’s almost a commandment in my practice.

But for every rule, there is an exception and the man sitting in front of me called on the exception.

He wanted, (or really “needed”) to stay in the same line of construction work.  But business was bad, there was a supplier suing the corporation, and then there was that pesky, state corporations law.

The duties of corporate officers

Hearken back to law school and Corporations.  Officers and directors owe the corporation a duty of loyalty.  They must not usurp corporate opportunities nor compete against the corporation.

My normal advice to business folk when a corporation needs to fold is to simply close the doors, liquidate any assets, pay the most important bills to the extent possible, and move on.

A corporation won’t get a discharge in Chapter 7.  If there are few assets, the trustee will probably close the case immediately following the 341 meeting.  So, the automatic stay won’t give a bankrupt corporation much breathing room.

Not much to be gained in a corporate 7.

My concern on these facts was that closing the doors on the corporate business, and reopening as a proprietorship, in the same line of work, using the same phone number, and the same small nest of tools would be subject to attack by the unpaid vendor.

Either, the claim would be that the individual had misappropriated the corporate assets and opportunities for himself, to the detriment of creditors, or that the new business was really just the alter ego of the failing corporation.

Bankruptcy as corporate funeral

The threat of breach of the duty of loyalty or alter ego claims fade if the corporation files Chapter 7.

Bankruptcy is a clear signal that the business, if not the corporation, is dead.  The bankruptcy court publishes the obituary.

A bankruptcy trustee conducts the final services.  With some ceremony, the business is interred.

The shareholder is left free from claims that going into business in the same line of work breaches his duty to the old corporation.  There is clearly no corporate business remaining.

Tidying up the corporate assets

Assuming that the trustee closes the corporate case as a no asset case, we will still have to dispose of the business effects of the corporation.

I will propose that the shareholder buy from the corporation, post bankruptcy, any tools or equipment useful in his new endeavor.  The purchase price goes into the corporate bank account.  A bill of sale will document the transaction.

If the phone number is actually in the name of corporation, rather than the individual as sometimes happens, we can either try to switch it to the individual’s new business name, or leave a recorded message on the old number referring callers to a new number.

This approach should make clear to creditors that the old entity is gone.  The no asset report establishes that there was nothing there.  The real live human being who needs to put food on the table is free to start over.

In this case, breaking my rule had a good outcome.

Image courtesy of Flickr and John Taylor

 

 

 

Bubble, Bubble, Toil and Trouble

ideas bubble

I find I’m back at the Bankruptcy Mastery keyboard.

Several years ago I thought I had said all there was to say here to new bankruptcy lawyers.

But stuff just keeps bubbling to the forefront and my fingers itch.

It seems there’s more to say, perhaps not exclusively to newbies, but to the broader community of consumer bankruptcy lawyers.

What’s up in bankruptcy

The law is changing.  Certainly the atmosphere in bankruptcy is changing.  And we look at record low new filings and wonder if there’s a living to be made here.

One thing I know about bankruptcy practice:  it’s cyclical.  I’ve been here for almost four decades, and  seen booms and busts.

We can be certain there will be another economic downturn.  We can’t be certain that bankruptcy will be the remedy of choice, but it’s hard to imagine it won’t.

And the capable and experienced bankruptcy lawyers will have all the work they can manage.

For certain, consumer champions are needed, today. The regulations that are currently under attack are often the regulations that help level the playing field for consumers.

We will need to be nimble, imaginative and relentless if our clients are not to be ground to dust by creditors, collectors, and their cohorts.

How about a little bit of heroic Tennyson:

Stormed at with shot and shell,

Boldly they rode and well,

Into the jaws of Death,

Into the mouth of hell…..

Forward.

Images by Pixabay

When Laws Collide, You Need The Right Word

As lawyers, words are our stock in trade.

If we want to describe, explain, or persuade, we need to use the right word.

The difference between the almost right word and the right word is really a large matter – ’tis the difference between the lightning-bug and the lightning.  MARK TWAIN

I was blown away by the casual simplicity and clarity of Ed Boltz’s explanation of the difference between preemption and preclusion in an exchange  that just flew by on the NACBA list serve.  (You are a member of NACBA, aren’t you?)

Boltz

Ed Boltz, NC Bankruptcy Lawyer

Ed has kindly permitted me to share here his charge to use the right word.

The discussion was originally about the 11th Circuit’s decision in Crawford v. LVNV, permitting FDCPA remedies for asserting of a stale claim in Crawford’s bankruptcy case. 

Take it away, Ed.

Choose your words carefully

It is vital to use terminology precisely, especially as different words cause different results to occur:

Preemption is when federal law supersedes or displaces state  law.

This can be partial or field preemption, express or implied, each with different criteria.

It occurs because the Supremacy Clause gives greater dignity (again a term with specific meaning) to federal laws than state or local.

Federal laws cannot preempt other federal laws, because they are of equal dignity.

Preclusion, however, is a means of resolving when federal laws conflict.

This can be express, for example, if one statute said that other statutes don’t apply. The Bankruptcy Code is replete with examples, i.e. amounts that would normally be collectible under the Tax Code are stayed and even dischargeable.

Preclusion can also be implied, for example where one statute does so much on a topic in certain circumstances  that other can’t function.  But here, a court must try to allow both statutes to function and to harmonize their goals and processes.

Preclusion at work

This is what most bankruptcy judges mean when they hold that the FDCPA is inapplicable to the bankruptcy claims process.  But when you read these holdings,  the courts aren’t usually deciding that the complained-of violation,  whether collecting on a stale debt,  not sending proper disclaimers, contacting represented consumers, is permitted.  The debts where the Statute of Limitations has run are disallowed.  Calls have to go through counsel.

What the judges do not want, however, is to be forced to give $1000 in statutory damages and attorneys fee, especially without any discretion.  That is the rub and it chafes, just as the lack of discretion in BAPCPA.  Judges want to judge, not be told by Congress how to run a calculator.

The problem for judges is, however, that Congress does get to tell them what to do.  So when the FDCPA determines (not arbitrarily, but for the very sound reason that absent the sting from statutory damages, creditors will not comply) that an attempt to collect a stale debt is worth $1000 plus actual damages, the bankruptcy judge has to ask whether that discretionless  award would utterly frustrate the purposes and processes of bankruptcy.

The question is not whether the Bankruptcy Code and Rules are sufficient to handle claims,  but whether the FDCPA is incompatible.

Picking Your Chapter 11 Teammates

9420983815_4857d1981b_zProfessionals in Chapter 11 have to be “disinterested“;  make sure they are also capable.

In two recent cases, the estate has employed professionals connected to the debtor in his pre filing past. It’s often the case that accountants and tax preparers come with familiarity with the debtor that seems useful.

You think that it’s economic to exploit that back story.

However, in the cases I’m recalling, the very history that made them appealing to the DIP has made it hard for the estate’s counsel to demand better performance than they have initially proffered.

Chapter 11 not for the newbie

I don’t talk much here about Chapter 11 issues.  Chapter 11 isn’t a big part of my practice and Bankruptcy Mastery is really for the less experienced bankruptcy practitioners.

I’m sure I’ve said it in print as well as in person:  a Chapter 11 is not an overgrown Chapter 13.

So if you are new to bankruptcy practice, stash today’s piece away til you are really ready to mastermind a Chapter 11.

No job for friends

When you represent the debtor in a Chapter 11, your client is actually the bankruptcy estate; the debtor in possession owes his loyalty to the creditors as a whole.

The DIP ends up in an uncomfortable spot if professionals of the estate were selected because of friendship,  perceived obligation, or the desire to do a good turn for a business buddy.

It developed for me, in a case I subbed into, that the professional, whose engagement had already been approved by the court, was delivering performance that was suspect.

The DIP sensed it, but was unwilling to call his friend on the issue.

In Chapter 11, a lot of the usual rules of business have changed.  Decisions outside of the ordinary are subject to notice to creditors;  dual loyalties that might pass outside of bankruptcy are unacceptable for professionals of the estate.  The professional with preexisting ties to the DIP may not get it, and the DIP may not have the gumption to call his buddy on it.

Competence first

It happens most often with accountants, in my experience:  the existing tax preparer knows the debtor, the way the books have been kept, the issues the debtor has faced.

It seems easier to employ someone who doesn’t have to start from scratch to do tax returns, tax planning and MOR’s.

Before the estate employs the existing accountant, I’ve got two questions.

First,  to what extent is the accountant complicit in whatever got the debtor into financial trouble?  If you are representing the DIP, you need to assess whether this professional was part of the problem, and whether the job, done properly going forward, will uncover things the accountant would rather not have exposed.

Second question:  is the existing professional up to the issues present in bankruptcy?  Bankruptcy adds complexity to every professional’s job.  My experience is confined largely to Chapter 11’s for individuals, and I remain bowled over by the bankruptcy tax issues that even capable tax professionals have never encountered.

My knowledge is confined to seeing the tax question.  It’s no fun when your fellow estate professional can’t see the question, much less help you find the answer.

Moral of the story:  it’s not sufficient to be “disinterested” within the meaning of the Code.  Estate professionals also have to be the right person for the job.

Image courtesy of  Simplificamos Su Trabajo

When Chapter 13 Debtors Run Amok

8632883494_62b7ddd71f_zWe’ve had a string of them….

[Hint: in a small practice, a “string” means “three. ” ]

But three clients in the past month with confirmed Chapter 13 plans have contracted to sell their homes without mentioning it to us, their attorneys.

The degree of chaos varied:  inadequate time to get approval of the sale from the trustee within the contractual closing date;  mortgage stripping issues when the plan is paid off early; and taxing authorities who decided to claim the post petition appreciation.

But the bigger problem is clear:  operating successfully in Chapter 13 requires debtors to absorb a bunch of information about how bankruptcy works.

  • What can they, and can’t they, do without prior consent?
  • What does the vesting option mean in the real world?

When is the best time to learn?

When we first meet prospective debtors, we’re dealing with people experiencing stress, shame, and overload.

Clients are overwhelmed with the information they must process on bankruptcy choices, procedure, and consequences.

When the case is confirmed, and all the client has to do (they think) is make the plan payments, they relax and tune out.

Yet we find clients borrowing money without the trustee’s consent; signing car contracts without considering their Chapter 13 plan; and selling stock to make ends meet.

If the only issue is covering our behinds, as professionals, we can write all the do’s and don’ts down, hand the client the tome, and get a receipt for its delivery.

That solves my problem, but isn’t likely to assure that the client reads, absorbs and recalls the admonitions when an issue arises a couple of years down the road.  The client who screws up is unlikely to be comforted by the fact I clearly told him what the rules were.

And the client who is injured by transgressing is likely to be resentful, at best, and vocal at worst, about the quality of the representation that he got.

Let’s trade fixes

What I learned from this string of fiascoes is that I need to deliver the “living in Chapter 13” commandments, in writing, after confirmation of the plan.  That doesn’t assure they get read or followed, but it ups the odds.

I can see a web page on the firm’s site, reciting the rules.

Maybe an instruction in our Chapter 13 representation agreement should reinforce the “ask first” directive.

How do you deliver this kind of information to clients?  What works better than others?

I’ve shared my train wrecks- it’s your turn to share solutions.

Image courtesy of Flickr and Shoji.k

One Trait Makes A Bankruptcy Lawyer Great

8677091677_b76c713b76_z (1)

One trait makes a bankruptcy lawyers  stand out.

Bankruptcy forms suck you in to the view that filing a case is just recording what the debtor owns and owes today.  If all you focus on is the here and now, you can assemble a bankruptcy petition.

But if there is one, uniform failing in average bankruptcy lawyers, it’s that they confine their attention to the here and now-what does the client have, owe, and earn.

Great bankruptcy lawyers take the broad view.  They look backwards and forwards from the filing date before uploading the petition.  Because bankruptcy rights and consequences flow from both the past and the future.

Let me count the ways this works.

Past events impact today’s petition

Our client’s present circumstances didn’t just pop up, overnight, like a mushroom.  They are the product of years of interlayered events.  The better we understand those events, the better we can advise the debtor.

  1. Means test income and Lanning :  does the 6 month look back income include a unique event, like a bonus, that won’t occur again?
  2. Preferences:  in the last 90 days, did they settle a suit, pay their student loans, make any transfer they don’t want undone?
  3. Transfers to insiders in the last year-  if client has been repaying family loans, you don’t want them surprised when trustee sues their parents
  4. Conveyances to “protect” assets– move title from debtor to buddy, and debtor may have set buddy up for suit and imperiled their discharge
  5. Contributions to 529 accounts  – money contributed to government sanctioned college savings accounts within two years may be recoverable by trustee
  6. Interstate moves–  a move between states within two years of filing may drive exemption options
  7. Fraudulent transfers under state law –  the statute of limitations on fraudulent transfers where I practice is four years, and the trustee assumes the creditor’s rights to recover the transfer
  8. Tax filings- if there’s tax debt, it matters whether client got an extension of time to file return and whether tax day fell on the 15th, 16th, or 17th three years ago
  9. Transfers with intent to hinder, delay or defraud within 10 years  522(0) provides for reduction of homestead exemption for bad acts within a decade

So, you may have to get the client’s life story to see all the issues in their bankruptcy filing.

Events after filing matter, too

We’d like to think that things are locked down, right and tight, when the case is filed.  But some post petition events will augment the property of the estate in ways that don’t benefit the client.

  1. Inheritances–  541 expands the scope of property of the estate to assets acquired by testate or intestate succession.  Did you inquire about the health of client’s relatives and their succession instrument of choice?
  2. Additional debts if it’s likely that the debtor will accrue more debts, perhaps from ongoing illness, those debts won’t be dischargeable for years if you file a Chapter 7 prematurely
  3. Mortgage payment adjustments coming  a mortgage payment reset may affect the means test and the money available to fund a Chapter 13.
  4. Real estate appreciation  post petition appreciation belongs to the estate.  In a rising real estate market, you may need to compel abandonment of property before it becomes attractive to the trustee
  5. Tax refunds – a fraction of any tax refund for the year of filing may belong to the estate.  If the client is overwithheld, did you advise reducing withholding to eliminate refund come April?
  6. Expiration of limitations on sale  when prepetition options vest, or restrictions on sale of stock expire, the trustee may be able to sell something previously worthless.

It’s not just filling out forms

The attorneys who see bankruptcy as “just filling out forms” set their clients up for unpleasant surprises.  It’s not easy or quick to extract all this information from a client who is stressed and self condemning.

Not easy, but the difference between adequate and great.

If you’re reading here, I’d like to think you’re a member of the Lake Wobegon Bar Association, where all the lawyers are above average.  Cheers.

Image courtesy of Flickr and Kim Seng

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.