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Monday, December 15, 2014

Hot Button Issues Before the U.S. Supreme Court: Bankruptcy Now Rules Docket

  Interesting statistic:  a litigant has a 1% or less chance of convincing the U.S. Supreme Court to review his, her or its burning legal issue that all other appellate courts have rejected, dismissed or pooh-poohed.  Don’t believe me? Look here:  http://dailywrit.com/2013/01/likelihood-of-a-petition-being-granted/

    As of today (December 15, 2014), the U.S. Supreme Court has accepted five—count ‘em, five—different bankruptcy issues to hear in its 2014-2015 term.  Depending upon your perspective, this is either like hitting a big-bucks lottery, or suffering the consequences of the old Chinese curse “May everything you wish for come true”.  In addition, the justices have decided, on January 9, 2015, to confer on whether to accept another bankruptcy issue on their docket of cases to hear and decide.

   Here are the five issues that the SCOTUS has agreed to decide, and the one it will consider in mid-January, in no particular order of importance:

1                 11 U.S.C. §506(d) Strip-Offs of Totally Unsecured Second Mortgages in Chapter 7:  At the circuit level, the 11th Circuit stands alone in permitting Chapter 7 debtors to use §§506(a) and 506(d) to “strip-off” second mortgages when a first mortgage eats up all the value in a residence or other real property.  

    The SCOTUS has accepted certiorari on two 11th Circuit decisions allowing second mortgage strip-offs: Bank of America, N.A. v. Caulkett, No. 13-1421 (lower court opinion here: https://cases.justia.com/federal/appellate-courts/ca11/14-10803/14-10803-2014-05-21.pdf); and Bank of America, N.A. v. Toledo-Cardona, No. 14-163 (lower court opinion here: http://sblog.s3.amazonaws.com/wp-content/uploads/2014/09/11thcir-toledo-cardona.pdf).

    For a more detailed examination of this issue, see my previous blog posts (on two other 11th Circuit cases denied certiorari) here:  http://impudentbankruptcylawyer.blogspot.com/2014/04/now-in-play-506d-strip-offs-in-chapter-7.html ;  and here: http://impudentbankruptcylawyer.blogspot.com/2014/06/11th-circuit-506d-strip-offs-part-deux.html.


2        Whether an Order Denying Confirmation of a Chapter 13 Plan is an Appealable “Final Order”:  This case originates from the First Circuit. This past spring, the First Circuit dodged the issue of whether a Chapter 13 debtor could propose and confirm a “hybrid” Chapter 13 plan (splitting a secured mortgage claim on underwater property into  “secured” and “unsecured” claims, and continuing paying the stripped-down secured claim after five years), and held instead that the debtor’s appeal  should be dismissed because the bankruptcy court’s order denying confirmation of the debtor’s Chapter 13 plan was not a “final” order for purposes of accepting appellate jurisdiction.

           The SCOTUS accepted certiorari on the First Circuit case, on December 12, 2014: Bullard v. Hyde Park Savings Bank, No. 14-116 (lower court opinion here: http://media.ca1.uscourts.gov/pdf.opinions/13-9009P-01A.pdf).  I examined the First Circuit opinion in my blog post here:  http://impudentbankruptcylawyer.blogspot.com/2014/05/sound-fury-no-hybrid-chapter-13-plan.html.


3        Bankruptcy Court Jurisdiction under Article III of the U. S. Constitution – Third Bite at the Apple:  First, we had Stern v. Marshall, in which the SCOTUS told us that bankruptcy jurisdiction—whether labeled ‘core” or “non-core”—did not extend to a bankruptcy court making final findings of fact or rulings of law on a state law issue that a debtor presents as a permissive (rather than mandatory) counterclaim to a creditor’s filed proof of claim.  The SCOTUS, in the majority opinion, assured us that its ruling was no sea-change to bankruptcy practice and limited in scope.  My previous blog post on Stern v. Marshall is here:  http://impudentbankruptcylawyer.blogspot.com/2012/12/stern-v-marshall-seminar-materials.html.

   Next, we had Executive Benefits Agency  v. Arkinson, in which a unanimous SCOTUS assured us that if a bankruptcy court is confronted with a state law issue masquerading as a “core” issue—such as, in this case, a fraudulent transfer lawsuit—that invokes the specter of Stern v. Marshall,  the bankruptcy court and/or the U.S. District Court may treat the bankruptcy court’s findings and rulings as "proposed”, as they would in a true non-core matter, and no harm would be done. My previous blog post on Executive Benefits Agency  v. Arkinson is here: http://impudentbankruptcylawyer.blogspot.com/2014/06/executive-benefits-insurance-agency-v.html.

   In Executive Benefits Agency  v. Arkinson, Justice Thomas’s opinion conveniently ducked the issue of whether parties who had an Article III objection to bankruptcy court jurisdiction could expressly or impliedly “waive” that objection and allow a bankruptcy court to issue final findings and rulings on the matter.  That issue, like many buried issues, rears its ugly head again in Wellness International Network, Limited v. Sharif, No. 13-935, scheduled for argument in mid-January (lower court opinion here:  http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2013/D08-21/C:12-1349:J:Tinder:aut:T:fnOp:N:1190505:S:0). In the Wellness International Network case, the SCOTUS has agreed to decide two issues: (a) whether  a subsidiary state property law issue that needs to be decided in order to determine whether property in the debtor’s possession is property of the bankruptcy estate stems from the bankruptcy itself or is an issue that a bankruptcy court lacks the constitutional authority to decide with a final order; and (b) whether litigant consent—express or implied—is enough  to permit a bankruptcy court’s exercise of the Article III judicial power, and if so, whether implied consent based on a litigant’s conduct is sufficient to satisfy Article III requirements for the exercise of that consent.


   The SCOTUS has scheduled January 14, 2015 for argument on this case; you can read all the briefs here:  http://www.scotusblog.com/case-files/cases/wellness-international-network-limited-v-sharif/.


4    Monies Paid into a Chapter 13 per a Confirmed Chapter 13 Plan: Who Gets the Funds if the Debtor’s Case is Converted to a Chapter 7 Case?:  There is a circuit conflict on this issue. 11 U.S.C. §348(f) says that, in a Chapter 13 case converted to Chapter 7 in good faith, the “property of the estate” is the property that the debtor came into bankruptcy with and “remains in the possession of or is under the control of the debtor on the date of conversion.” Such property apparently excludes undistributed monies—specifically, post-petition wages—that a debtor paid to the Chapter 13 trustee for distribution per a confirmed Chapter 13 plan.  The Third Circuit said that the statute (and 11 U.S.C. §1327(a)) required paid-in monies to be returned to the debtor and not distributed by creditors. In re Michael, 699 F.3d 305 (3rd Cir. 2012). The Fifth Circuit said that the statutes fail to adequately address the situation, the Chapter 13 plan needs to be respected, and the paid-in monies need to be distributed to creditors per the plan. Vieglelahn v. Harris, located here: http://www.jthomasblack.com/library/20140707-Vieglelahn-v.-Harris--13-50374--5th-Cir.-2014-.pdf. The SCOTUS accepted the debtor’s writ of certiorari regarding the Fifth Circuit decision; the case and docket number are Harris v. Viegelahn, No. 14-400.


5     The Extent of Bankruptcy Court Authority to Award Fees under 11 U.S.C. §330: Another Fifth Circuit decision is up for review.  Baker Botts, L.L.P. v. ASARCO, L.L.C., No. 14-103 (lower court opinion: http://sblog.s3.amazonaws.com/wp-content/uploads/2014/09/5ht-cir-12-40997-.pdf) involves a Chapter 11 case, but raises issues near and dear to all bankruptcy attorneys’ hearts:  (a) under 11 U.S.C. §330, can the bankruptcy court award “fee enhancements” (as opposed to fees based solely on hourly rates and time, i.e., the “lodestar” method) for exceptional results in a bankruptcy case; and (b) under the same statute, can the bankruptcy court approve fees for litigation associated with defending a fee application? The Fifth Circuit said “yes” to the fee enhancement, but “no” to the fee application litigation fees.  On the latter subject, the circuit court noted that §330(a)(6) allows for fees to be awarded only for preparation of a fee application.  I suspect, however, that the fee enhancement issue will draw much more attention in the briefs and argument of this case.


6     Whether a Bankruptcy Court can Limit or Eliminate “Plan Injunctions”  and Releases in Favor of Non-Creditors in a Chapter 11 Plan (Pending Petition for Certiorari): This writ of certiorari tests a bankruptcy court’s power to deny enforcement or approval of injunctions and releases in favor of non-creditors, which injunctions and releases are included in a proposed Chapter 11 plan. You can read the writ for certiorari here: http://sblog.s3.amazonaws.com/wp-content/uploads/2014/11/30262-pdf-Goroff.pdf and the lower case opinion (from the 4th Circuit) here: http://www.ca4.uscourts.gov/Opinions/Published/131608.P.pdf The case and docket number are National Heritage Foundation v. The Highbourne Foundation, No. 14-481.

©Kevin C. McGee 2014

Thursday, June 19, 2014

11th Circuit: §506(d) "Strip-Offs" Part Deux

What Has Gone Before

     Back in April, I posted about the U.S. Supreme Court's denial of certiorari on an unpublished order of the 11th Circuit Court of Appeals, in which the 11th Circuit followed a previous unpublished decision that allowed wholly unsecured liens to be "stripped off" in Chapter 7, using 11 U.S.C. §§506(a) & (e). As I discussed in that post, the 11th Circuit interpreted Dewsnup v. Timm, 502 U.S. 410 (1992) to be limited to partially secured first mortgages, and followed its own precedent  -- handed down before Dewsnup v. Timm --  in ruling that 11 U.S.C. §506 could be used to void wholly unsecured mortgages and liens in Chapter 7. See Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989).

     I also noted that the 11 Circuit stood as an outlier on this issue, and that the other circuits reaching the same issue had ruled that Dewsnup v. Timm controlled (and forbade)  the use of §506 against wholly unsecured liens in Chapter 7. My prior blog post is here:  http://impudentbankruptcylawyer.blogspot.com/2014/04/now-in-play-506d-strip-offs-in-chapter-7.html

  The 11th Circuit Speaks Again
 
     The 11th Circuit, on June 18, 2014, published a decision in which it adopted the majority view allowing debtors to use a "Chapter 20" to strip off liens. The decision is Wells Fargo Bank, N.A. v. Scantling (In re Scantling), ___ F.3d ____ (11th Cir. Docket No 13-10558, 6/18/14), and you can read it here: http://www.ca11.uscourts.gov/opinions/ops/201310558.pdf

     You won't find "Chapter 20" in the Bankruptcy Code; bankruptcy lawyers use it as a term of art to describe a two-step process used to strip off unsecured junior liens and mortgages. First, the debtor files a Chapter 7 bankruptcy and obtains a discharge of the underlying promissory note and other debt. Second, immediately after the Chapter 7 discharge, the debtor files a Chapter 13, in which the debtor files a plan (usually with token payments for lien creditors) and files a motion, under 11 U.S.C. §506, to determine that the liens remaining after the Chapter 7 are void because they are wholly unsecured.

     Here's the trick: the debtor in these circumstances does not care that he or she cannot get a "discharge" in Chapter 13; the debtor's sole purpose is to use his or her Chapter 13 case to void and "strip off" the unsecured mortgages. 11 U.S.C. §1328(f) mandates a four year waiting period (after the date the debtor filed the prior Chapter 7) for filing a Chapter 13 in which the debtor seeks a discharge. But -- nothing in the Bankruptcy Code prohibits the debtor from filing a Chapter 13 for another purpose in that four year waiting period, so long as the debtor can confirm a plan according to the dictates of Chapter 13.

     Wells Fargo argued that the Chapter 13 plan and discharge must go hand-in-hand. However, a Chapter 13 plan does more than secure a discharge after all its payments are completed: it allows the debtor to cure mortgage defaults; pay off income tax debt over five years, without further accrual of interest and penalties; and allows the avoidance of wholly unsecured mortgages, even on the debtor's primary residence. 11 U.S.C. §1322(b)(2) states that the plan may: "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." Although the SCOTUS has ruled that Chapter 13 debtors cannot use §506(a) to modify a partially secured mortgage on a residence,  Nobelman v. American Savings Bank, 508 U.S. 324 (1993), most circuits -- including the 11th Circuit -- have ruled that a §506(a) valuation can be combined with §1322(b)(2) provision in a plan to void a wholly unsecured mortgage. See Tanner v. Firstplus Financial, Inc. (In re Tanner), 217 F.3d 1357 (11th Cir. 2000). In other words, if there is no equity in the residence to secure any part of the mortgage, the mortgage becomes a wounded gazelle on the African savannah, and the Chapter 13 plan is the lion.

     The 11th Circuit recognized Chapter 13's versatility and thus followed the majority of bankruptcy courts, district courts and circuit courts in allowing Ms. Scantling's "Chapter 20" and her plan to void Well Fargo's second and third mortgages on her residence.

     Of particular interest is footnote 5 of the decision, in which the 11th Circuit stated:

      We are also mindful of the recent unpublished opinion in Wilmington Trust, National 5 Ass’n v. Malone (In re Malone), No. 13-13688, 2014 WL 1778982 (11th Cir. May 6, 2014), which was decided after oral argument in the instant case, in which a panel of this court recently found it was bound by prior published decisions and affirmed a decision by the bankruptcy court, in a Chapter 7 proceeding, that allowed a debtor to strip off a worthless second priority lien.

The Bottom Line


     Debtors in the 11th Circuit have the best of both worlds: if they are daring, they can try to strip off their wholly unsecured mortgages in their Chapter 7 case (and now, those debtors have a footnote in a published opinion to cite). If they are not daring (and have the funds for filing two bankruptcy cases), they can take the safer route of a "Chapter 20" to get rid of their second or third mortgage.

©Kevin C. McGee 2014

Monday, June 9, 2014

EXECUTIVE BENEFITS INSURANCE AGENCY v. ARKINSON: THE STERN V. MARSHALL APPLE CART STAYS UPRIGHT

     This morning, on June 9, 2014, the U.S. Supreme Court issued its unanimous decision in Executive Benefits Agency  v. Arkinson, settling an issue that has plagued federal courts on all levels since the SCOTUS’s 2011 decision in Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594 (2011):

Does the bankruptcy court violate Article III of the U.S. Constitution or Title 28 of the United States Code if it issues proposed findings and rulings on the type of issue identified in Stern v. Marshall as “core” under the bankruptcy statutory scheme, but beyond the tolerance of Article III if the bankruptcy court makes final findings of fact and rulings of law?

The Basics: Bankruptcy jurisdiction, since 1984, has divided issues into two categories: “core” matters spelled out in 28 U.S.C. §157(b)(2), which involve matters “arising in” a bankruptcy case and that a bankruptcy court would be expected to decide as part of the bankruptcy case (i.e., deciding whether proofs of claim are allowed, adjudicating the debtor’s discharge or the dischargeability of certain debts, confirming plans of reorganization); and “non-core” matters, which are matters “related to” the bankruptcy case. 

     Classic examples of “non-core” matters are disputes between non-parties, and the debtor’s pending state law claims against other persons.  28 U.S.C. §157 envisions that bankruptcy courts, as adjuncts of the U.S. District Courts to whom the District Courts “referred” all bankruptcy and related matters, can issue final findings of fact and final rulings of law on core matters. If the matter is “non-core”, 28 U.S.C. §157(c)(1) still allows the bankruptcy court to hear the case,  but issue only “proposed” findings and rulings for the U.S. District Court to either confirm or rehear.  28 U.S.C. §157(c)(2) allows bankruptcy courts, like U.S. magistrates, to finally determine any non-core matters if both parties to the matter consent.

     The difference between “core” and “non-core” has traditionally been on appeal. If the matter is core, then the U.S. District Court (or a Bankruptcy Appellate Panel) sits as an appellate court and its standard of review is “abuse of discretion” on factual findings and “de novo” (or “anew”) on rulings of law based on those facts (28 U.S.C. §158(a)). If the matter is non-core, the appellant gets another shot to try the case in front of the U.S. District Court, which looks at the proposed factual findings as suggested findings, and can rehear evidence to reach its own factual findings (28 U.S.C. §157(c)(1)).

The Effect of Stern v. Marshall: Stern v. Marshall, in effect, created a third category of matters for the bankruptcy court: “core” under the statutory definitions, but beyond the bankruptcy court’s power to finally decide under the U.S. Constitution. In Stern, the “core” matter was the debtor’s state law counterclaim to a proof of claim filed by a creditor. Because the counterclaim could not be decided based on the same facts and occurrences raised in the proof of claim, it was a “permissive” counterclaim instead of a “mandatory” counterclaim; however, 28 U.S.C. §157(b)(2)(C) provides that all “counterclaims by the estate against persons filing claims against the estate” fall into the “core” category, including the permissive state law counterclaims.

     The SCOTUS held that if the allowance of the debtor’s permissive state law counterclaim did not have the effect of directly offsetting the proof of claim amount, Article III prohibited the bankruptcy court’s decision of that counterclaim  as a “core” matter (with final findings and rulings). The SCOTUS majority (it was a 5-4 decision authored by Chief Justice Roberts) believed that “the removal of counterclaims such as [the debtor’s counterclaim] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the Unite States that the question presented here is a “narrow” one.”

Post Stern v. Marshall ConfusionStern v. Marshall threw bankruptcy courts, U.S. District Courts, and U.S. Circuit Courts of Appeal into a jurisdictional tizzy. If the bankruptcy court’s “core” jurisdiction could be questioned for counterclaims to proofs of claim, then does the bankruptcy court’s final decision of other types of “core” matters implicate Article III?  Will the U.S. District Court be forced to withdraw its “reference”  of Stern “core, but really non-core” matters in every case, or can the bankruptcy court issue proposed findings and rulings in such matters as if they were non-core matters under the statute? Can the parties consent – or be deemed to consent – to the bankruptcy court’s final decision of Stern matters?  Does Article III allow bankruptcy courts to decide any Stern matter, regardless of consent of the parties?

   Lawyers in bankruptcy court were just as flummoxed. What the heck is a Stern matter? Do you commit malpractice if you don’t challenge the bankruptcy court’s “core” jurisdiction on any issue that might be beyond that jurisdiction per Article III, such as fraudulent transfers and preferences? Does filing a proof of claim still waive objections to bankruptcy court jurisdiction on Stern matters, as it does with jury trials on preferences and fraudulent transfers? Do you need to file a motion for withdrawal of the reference from the bankruptcy court as an automatic reflex?

     Local rules and orders from District Courts and bankruptcy courts tamed some of this chaos by: keeping the reference with the bankruptcy court; allowing for District Courts to second-guess bankruptcy court determinations that a Stern matter was or was not involved; and permitting U.S. District Court to treat bankruptcy court “final” findings and rulings as “proposed” if the bankruptcy court guessed wrong on a Stern issue.

Executive Benefits Agency  v. Arkinson Background: Executive Benefits Agency  v. Arkinson involved state law fraudulent transfer claims asserted under 11 U.S.C. §544; these types of claims were one of the fertile sources for post-Stern confusion. 28 U.S.C. §157(b)(2)(H) identifies all fraudulent transfer claim determinations as “core”. However, there are federal fraudulent transfer claims – asserted under 11 U.S.C. §548 – and state fraudulent transfer claims – asserted under §544(a). Moreover, there are jury trial rights associated with fraudulent transfer claims, if the transferee had not filed a proof of claim.   Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989); Langenkamp v. Culp, 498 U.S. 42 (1990).

     In this particular case, the transferee had not filed a proof of claim. At the bankruptcy court level, the court entered summary judgment for the trustee bringing the claims. The U.S. District Court (W.D. Wash.) treated the bankruptcy court’s findings and rulings as proposed, reviewed those findings and rulings de novo, and the matter proceeded up to the 9th Circuit Court of Appeals.  After the appellant’s opening brief, the SCOTUS decided Stern v. Marshall. Despite the appellant’s argument, based on Stern, that the bankruptcy court lacked any authority under Article III to rule on the summary judgment motion, the 9th Circuit affirmed the U.S. District Court.  The 9th Circuit held that either the appellant had, in effect, consented to bankruptcy court jurisdiction below, or the bankruptcy court in this instance issued only proposed findings and rulings that the U.S. District Court then confirmed.  

Executive Benefits Agency  v. Arkinson SCOTUS Decision: Justice Thomas authored the decision for a unanimous court. The justices ignored the “consent” issue, and went directly to the issue of whether the U.S. District Court could have treated the bankruptcy court summary judgment determinations as “proposed” despite the lack of an indication from the bankruptcy court regarding whether it issued a “final” or “proposed” summary judgment order. Justice Thomas, focusing on the statutory scheme in 28 U.S.C. §157, stated that Stern v. Marshall effectively invalidated §157(b)(2) as to any “core” matter that Article III prohibited the bankruptcy court from deciding as a “core” and final matter. The Court noted, however, that in enacting 28 U.S.C. §157, Congress also enacted a “savings” provision, as follows:

“If any provision of this Act or the application thereof to any person or circumstance is held invalid, the remainder of this Act, or the application of that provision to persons or circumstances other than those as to which it is held invalid, is not affected thereby.” 98 Stat. 344, note following 28 U. S. C. §151.

     Using that savings provision, Justice Thomas held that the invalidation of a matter as “core” on constitutional grounds threw that matter into the “non-core” bin. As a result, the bankruptcy court could still issue proposed findings and rulings on the matters under 28 U.S.C. §157(c)(1). The U.S. District Court’s review of the bankruptcy court’s summary judgment order on a de novo basis treated that order as “proposed”, and the SCOTUS affirmed the 9th Circuit decision on those narrow grounds. The slip opinion is located here: http://www.supremecourt.gov/opinions/13pdf/12-1200_2035.pdf

What Comes Now?  Three thoughts after reviewing the Executive Benefits Agency  v. Arkinson decision:

·         The SCOTUS has blessed the creation of three categories of bankruptcy court matters: “core” matters, “non-core” matters, and “core” matters treated as non-core per Stern. It also has told us that Stern issues may safely be handled as if they were "non-core" matters instead of "core" matters defined in §157(b)(2).

·         Although the SCOTUS ignored the consent issue raised in the 9th Circuit (see Slip Op. at p. 4 fn. 4), its decision opens the back door to allowing a bankruptcy court’s final determination of a Stern matter “by consent” under 28 U.S.C. §157(c)(2). If the savings provision allows treatment of an invalidated “core” matter as a matter under §157(c)(1), it also allows it to be treated as a matter for consent under §157(c)(2), which provides: “Notwithstanding the provisions of [§157(c)(1)], the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy court to hear and determine and to enter appropriate orders and judgments, subject to review [as final orders and judgments under 28 U.S.C. §158(a)].” Check your local rules and orders of reference from your local U.S. District Court, as well as any post-Stern orders and rules adopted. Arguably, in Massachusetts, LR 206 modifies the general reference in LR 201 and requires proposed findings and ruling on Stern matters; however, who knows what happens if the bankruptcy court determines that LR 206 does not apply because it finds that all parties consented to its final determination?


·         The Executive Benefits Agency  v. Arkinson decision, following Stern v. Marshall, places the onus on both bankruptcy courts and litigants to confront – early in a case -- whether a “core” matter is really a Stern matter, and act accordingly. The hard issues will continue to be in the area of avoidance recoveries – especially preferences and fraudulent transfers. Note that the SCOTUS left open – and did not decide – whether a §544 avoidance action is really a Stern matter (Slip Op. at p. 11). The justices seemed more concerned with straightening out the procedural morass rather than wrestling with the limits of bankruptcy court jurisdiction over §544 avoidance actions. Thus trustees, debtors, creditors with proofs of claim, and transferees without proofs of claim remain free to argue most of the questions set forth above to probe the extent of bankruptcy court jurisdiction over certain matters.

©Kevin C. McGee 2014

Thursday, May 15, 2014

Sound & Fury & No Hybrid Chapter 13 Plan Decision From The First Circuit

  In high school, my English teacher tasked me with memorizing and reciting a monologue from Shakespeare’s famous "Scottish Play", Macbeth. The monologue – the title character delivered it -- came from Act V, Scene 5, after Lady Macbeth’s own guilt catches up with her and takes her own life.  Although I sometimes confuse my own children’s names, I can still recall – and spout out instantly -- the lines I memorized and recited in front of the class some 42 years ago:

                Tomorrow, tomorrow and tomorrow
                Creeps in this petty pace from day to day
                To the last syllable of recorded time
                And all our yesterdays have lighted fools
                The way to dusty death
                Out, out brief candle!
                Life is but a walking shadow,
                A poor player who struts and frets
    His hour upon the stage
                And then is heard no more.
    It is a tale told by an idiot
                Full of sound and fury
                Signifying nothing.

 The last half of the speech well prepared me to be a lawyer. There is much sound and fury (some of it from me), and much of it does signify very little, if anything at all. I have also heard many tales told by people of questionable intelligence, and I have often felt that I am a “poor player” emoting uselessly in a courtroom for my allotted time.

 That monologue also sometimes applies to describe decisions from higher courts. Take the case of Louis B. Bullard, a Chapter 13 debtor with an ambitious Chapter 13 plan (or, at least, a desperate bankruptcy attorney). Mr. Bullard came into bankruptcy court with a two unit residence that had more mortgage on it than it had value. After trying two (failed) Chapter 13 plans, Mr. Bullard proposed a “hybrid” Chapter 13 plan with the following treatment of his mortgagee’s claims (Hyde Park Savings Bank): the mortgagee’s claims would be bifurcated into a secured claim – up to the fair market value of the property – and an unsecured claim for the remaining balance on the mortgage. Mr. Bullard proposed to continue paying this reduced secured claim with his usual principal and interest mortgage payments, to give the mortgagee whatever pittance his unsecured creditors would receive for its unsecured claim, and to continue making his regular mortgage payments after the 5 year period until he paid the (reduced) secured claim in full (at which point Hyde Park Savings Bank would be compelled to give him a discharge of its mortgage).

  The bankruptcy court and the Bankruptcy Appellate Panel for the First Circuit (the “BAP”) both agreed that the Bankruptcy Code did not permit confirmation of a Chapter 13 plan with these terms. Neither court had an issue with the “modification” of the secured claim under 11 U.S.C. §1322(b)(2); he rented out one unit in the property while living in the second unit, so Hyde Park’s mortgage covered more than just Mr. Bullard’s residence, and thus could be modified. However, both courts also stated that the Bankruptcy Code presents the debtor with an “all or nothing” decision regarding secured claims under §1325(a)(5): either Mr. Bullard could have the total, nonbifurcated mortgage claim allowed and continue to make the regular mortgage payments during the Chapter 13 and after the case for the (30 year)  life of the mortgage, or Mr. Bullard could modify the mortgage claim to limit it to the value of the property, and pay off that allowed amount in sixty equal payments that also, in total, equaled the “present value” of the total, nonbifurcated mortgage claim.

 To give you a sense of the consequences Mr. Bullard tried to avoid: Hyde Park filed a proof of claim for roughly $345,000.00. The value of the property was either $245,000.00 (per Mr. Bullard) or $285,000.00 (per Hyde Park); in order to “cram down” a modified secured claim of $265,000.00 (the halfway point between the two values), Mr. Bullard would have to pay 60 equal payments to Hyde Park over 5 years, and those payments would either have to equal a present value of $345,000.00 or be adjusted to approximate that present value (based on my quick calculation, assuming a 2.3% annual rate of return: the payments would have to total at least $308,000.00, or $5,133.00 per month over 5 years).

  The bankruptcy court entered an order denying confirmation of the plan; you can read it here:  https://ecf.mab.uscourts.gov/cgi-bin/show_case_doc?98,393096,,30923265.  Mr. Bullard – recognizing that there is an issue regarding whether an order denying plan confirmation is a “final” order for purposes of appeal -- chose to appeal the order to the BAP and moved that the BAP permit an interlocutory appeal of the order; the BAP granted that motion, then issued its own decision affirming the bankruptcy court order (located here: http://media.bap1.uscourts.gov/cgi-bin/bpgetopn.pl?OPINION=12-054P).

 Mr. Bullard then sought to have the First Circuit Court of Appeals (the “First Circuit”) review the BAP’s decision. After some initial reluctance, and after hearing from Mr. Bullard regarding why the First Circuit should take the appeal, the First Circuit ordered the case to be briefed both on the jurisdictional issues and on the merits.

 Naturally, this briefing order caused some excitement in the local bankruptcy bar. Would the First Circuit blaze a trail allowing Chapter 13 hybrid plans, or quash the idea of such plans? As the BAP recognized, there was not only a split among bankruptcy courts in Massachusetts (Compare In re Pires, 2011 WL 5330772, at *7 and In re Fortin, 482 B.R. 35, 43 (Bankr. D. Mass. 2012), with In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994)), but there was also a split among bankruptcy courts elsewhere (Compare In re Elibo, 447 B.R. 359, 363 (Bankr. S.D. Fla. 2011) (adopting McGregor); and In re Pruett, 178 B.R. 7, 8 (Bankr. N.D. Ala. 1995) (Id.) with Enewally v. Washington Mutual Bank (In re Enewally), 368 F.3d 1165, 1171-72 (9th Cir. 2004) and bankruptcy courts in Connecticut, North Carolina, Florida, Ohio, Pennsylvania, Michigan and Virginia, all of whom rejected hybrid Chapter 13 plans).  Could this also lead to a Supreme Court case and establish a national rule allowing or disallowing hybrid plans?

  On May 14 2014, the First Circuit demonstrated that all the briefing and oral argument on the hybrid Chapter 13 plan issues was just sound and fury, signifying … a little bit of something. In Bullard v. Hyde Savings Bank, ___ F. 3d ___  (1st Cir. 5/14/14 Case No. 13-9009), the First Circuit ruled that it could not decide the appeal from the BAP’s order affirming the bankruptcy court because, if the bankruptcy court’s order was not a final order, the BAP order could not be a final order and the First Circuit had no jurisdiction to hear the appeal. 

  The First Circuit stated that a bankruptcy court order denying confirmation of a Chapter 13 plan could not be a final order while the bankruptcy case was still open and while the debtor could still take another shot with an amended plan.  The court also opined that Mr. Bullard chose the wrong appellate path if he wanted this issue decided on appeal; he should have either taken his appeal to the U.S. District Court on an interlocutory appeal (followed by another interlocutory appeal from that court to the First Circuit), or applied for direct review by the First Circuit pursuant to 28 U.S.C. §158(d)(2). Because he chose the BAP instead of these options for appellate review, he lost his right to further review after the BAP affirmed the bankruptcy court.

  Thus, the First Circuit dismissed Mr. Bullard’s appeal for lack of jurisdiction, without ever reaching the merits. In a footnote, the First Circuit did note that it would be a different story if the bankruptcy court had entered an order confirming the plan, and then the BAP had reversed the bankruptcy court, as it had last month in Prudential Insurance Co. of America v. SW Boston Hotel Venture, LLC (In re SW Boston Hotel Venture, LLC), ___ F.3d ___, 2014 WL 1399418 (1st Cir. Apr. 11, 2014)(reversing the BAP’s decision reversing and remanding a bankruptcy court order confirming a Chapter 11 plan).

The Bottom Line: Instead of getting an earth-shaking game-changer of a decision from the First Circuit that would break open the floodgates and allow hybrid Chapter 13 plans, we got a dry lesson in bankruptcy appellate jurisdiction and procedure. While the decision may be interesting to wonks like me and useful to any attorney who plans to seek an appellate remedy for the injustice of a bankruptcy court order denying confirmation of his or her client’s plan of reorganization, we are a small circle of practitioners who care. It does provide the lesson that if you chose to pursue an interlocutory appeal through the BAP instead of the U.S. District Court or directly to the First Circuit, that choice may limit your appellate options beyond the BAP.  And now that I have strutted and fretted my 1,486 words, I am off the stage. 

©Kevin C. McGee 2014

Friday, April 11, 2014

When is a Waiver Not a Waiver? The New Rules of Massachusetts Homesteads

     Last month, Judge William Hillman of the Boston Bankruptcy Court, in In re Maria A. D’Italia, Case No. 13-16051-WCH (March 18, 2014), confronted the following questions:  if a debtor signs a waiver of homestead rights in a guarantee, does that waiver then either: (a) release or subordinate the debtor's homestead vis-à-vis the creditor’s judgment and execution based on the debtor’s guarantee liability;  or (b) prohibit the debtor from avoiding the creditor’s execution on her home as a “judicial lien” under 11 U.S.C. §522(f)(1)?

     Judge Hillman answered both questions in the negative. To understand his answers, let’s review the homestead law in Massachusetts.

Massachusetts Homestead Basics

     In 2010, Massachusetts overhauled its homestead laws.  Under the revised laws:
  •       A homestead is now automatic without the need to file a declaration of homestead, and protects equity in a residence up to $125,000.00 in value (M.G.L. c. 188, §§1 & 4).
  •          If a homeowner records a homestead declaration in the appropriate registry of deeds signed by all owners of the residence, the homestead protects up to $500,000.00 in equity in the residence; however, the homestead declaration must be separate and not included in the deed to the property (M.G.L.. c. 188, §§1 & 3).
  •            The homestead (whether automatic or declared, and except as noted below for elderly and disabled individuals) remains “whole and unallocated” for joint tenants or tenants by the entirety (i.e., co-owning spouses) when the tenants are asserting their interests separately against one of their creditors, but the tenants cannot exceed the applicable homestead limit (i.e., "stack" the homestead amounts) when they assert the homestead together (M.G.L. c. 188, §1). Tenants in common and holders of beneficial interests get protection equal to their ownership percentage multiplied by the homestead amount (i.e., a 30% tenant in common would have homestead protection of $150,000.00 based on a $500,000.00 total homestead in the entire property).
  •          An “elderly” person’s homestead– over 62 years of age – and a disabled person ‘s homestead applies to their entire ownership interest asserted separately. In other words, a home owned in a tenancy by the entirety by two elderly spouses gets up to $1 million of equity in protection for a declared homestead ($500,000 x 2), because each person can claim up to $500,000.00 in their separate property interest, and "stack" the homesteads to claim an aggregate exemption of $1 million together (M.G.L.. c. 188, §§1 & 2).
  •           Homesteads apply to “homes” owned by sole owners, joint tenants, tenants by the entirety, tenant in common, life estate holders, and the holders of beneficial interests in a real estate trust holding title to a residence. A homestead benefits the spouses and minor children (under 21) of any of those owners who live in the home, whether or not those family members have an ownership interest in the home.  A “home” can be a single family dwelling, a 2-4 family home, a manufactured home, a condo unit,  or a residential coop unit. The homestead protection also extends to the home’s sale proceeds and to insurance proceeds from a fire or casualty loss on the home (M.G.L. c. 188, §1).
  •           The instances in which homesteads are waived, released or trumped by a debt are more limited than before. Specifically:
o     Homesteads are subject to (and ineffective against): (a) liens for federal, state and local taxes and assessments; (b) a lien recorded prior to the creation of the homestead; (c) prior recorded mortgages and certain mortgages recorded after the creation of the homestead (see below); (d) child support and alimony orders; and (e) an execution to enforce a judgment based on the owner’s fraud, mistake, duress, undue influence or lack of capacity (M.G.L. c. 188, §3)[1].

o      A homestead is subject to a mortgage signed by all the owners of the property; however, if the mortgage is signed by fewer than all of the owners of the property, then the mortgage takes priority over only the homestead of the owner(s) who signed the mortgage. The homestead is subject to a mortgage on the property regardless of whether the mortgage addresses the subordination or waiver of the homestead. No release or recorded subordination of the homestead is necessary for the mortgage to prevail over the homestead (M.G.L. c. 188, §9).

o     Otherwise, there is no subordination of a homestead to any other lien unless the owner records a release of the homestead (M.G.L. c. 188, §10(2)).
  •          A homestead is terminated or released only if:
o     The owners sell the property to a non-family member (M.G.L. c. 188, §10(1)); however, there is no release or termination(unless there is an express release) if the deed: (a) is between spouses or former spouse, or co-owners who jointly hold the homestead; (b) a trustee of a trust holding the property and a trust beneficiary; or (c) between a life tenant and a remainderman (M.G.L. c. 188, §10(5)(b)).

o     There is a recorded release of the homestead signed by the owner and any non-owner spouse or former spouse living in the home (M.G.L. c. 188, §10(2)).

o     The owner abandons the home; however, the homestead termination applies only to those owners and family members who actually abandon the home, and not to any family member who do not abandon the home. Also, the owner’s absence from his or her home due to military service cannot constitute “abandonment” (M.G.L. c. 188, §10(3)).

o     The trustee of a realty trust or a beneficiary of the trust records a release of the homestead on the property held in trust, or the beneficiary abandons the homesteaded property (M.G.L. c. 188, §10(4)).

o     The owner records a new declaration of homestead on other property; however, that new declaration does not affect the homestead rights of the owner’s spouse, former spouse or minor children still residing in the old property.

Application of Massachusetts Homestead Law to the Claimed Homestead Waiver

     Judge Hillman focused on three statutes: (a) the Massachusetts homestead law, specifically the release and termination provisions in c. 188, §10; (b) 11 U.S.C. §522(f)(1), which permits a debtor to avoid a “judicial lien” (such as an execution) if it impairs a debtor’s claim of exemption; and (c) 11 U.S.C. §522(e), which states that any exemption waiver signed by a debtor in favor of an unsecured claimholder is unenforceable in the debtor’s bankruptcy case, as is any waiver of the debtor’s right to avoid a judicial lien under §522(f).

     The facts of the case were that the debtor had signed a guarantee of a commercial lease and a loan, in connection with the build-out of a Dunkin’ Donut franchise. The guarantee stated that the debtor/guarantor “irrevocably waives, to the fullest extent permitted by law, all defenses which at any time may be available in respect of the Guarantor’s Obligations hereunder by virtue of any homestead exemption, statute of limitations, valuation, stay, moratorium law or other similar law now or hereafter in effect.” The creditor did not record either the guarantee or any other document reflecting this waiver.

     The business deal fell apart, and the creditor holding the guarantee sued, obtained a $539,000.00 judgment and execution, and recorded the execution against the residence in Buzzard’s Bay, Massachusetts, owned by the debtor and her spouse. The debtor's spouse had recorded a homestead declaration on their residence in 2009, and the debtor asserted a $500,000.00 exemption in the residence in her Chapter 7 bankruptcy case. The creditor filed a timely objection to the homestead, asserting that the homestead was invalid as to the creditor because of the waiver in the guarantee. The debtor responded to the objection, and also filed a motion to avoid the creditor’s judicial lien under 11 U.S.C. §522(f).

     The stakes: if the homestead exemption was good despite the waiver, the debtor could avoid the creditor’s judicial lien on her residence in full.[2] 

     Judge Hillman did validate the debtor’s homestead exemption despite the creditor’s objection, based on the lack of a recorded release reflecting the guarantee waiver. He relied on M.G.L. c. 188, §10, which requires such a document to be recorded.  He also relied on 11 U.S.C. §522(e), which automatically invalidates any waiver of exemption in favor of an unsecured claim.  He considered §522(e) along with §522(f)(1), and held that a judicial lienholder whose lien is avoidable is in essence an “unsecured creditor”. As such, the creditor holding an avoidable judicial lien is subject to§522(e)’s invalidation of any waiver of exemptions (he also noted that if the judicial lien was NOT avoidable, it did not matter whether the debtor had waived his or her exemption on the property).

     The link to Judge Hillman’s decision is here: https://ecf.mab.uscourts.gov/cgi-bin/show_case_doc?46,441971,,89110135. Judge Hillman is always a pleasure to read, because he is a writer who says a lot with a few words. To put it simply (as he would): if the release or waiver of a Massachusetts homestead is not recorded, there is no release of the homestead. Period.


         [1] But see In re Weinstein, 164 F.3d  677 (1st Cir. 1999) and Owen v. Owen, 500 U.S. 305(1991), in which state limitations on homesteads were federally pre-empted under 11 U.S.C. §522(f)(1), to the extent that the judicial lien to be avoided would have prevailed over the homestead under state law.

         [2] The Court did not address debtor’s first attempt to avoid the creditor’s judicial lien in this decision, because it denied the debtor’s motion (without prejudice) because the debtor had omitted necessary allegations under 11 U.S.C. §522(f)(1). The debtor refiled the motion with the proper allegations, and the motion is pending (with opposition from the creditor, focused on the debtor’s lack of an appraisal to support her alleged value of her residence). 


©Kevin C. McGee

Thursday, April 3, 2014

CHAPTER 13 FOR BUSINESS DEBTORS IN MASSACHUSETTS

      Chapter 13 is not just for consumers. An individual in a sole proprietorship (or who is engaged in some business activity, such as renting properties as a landlord) has Chapter 13 available to him or her, provided that he or she meets the debt limits in 11 U.S.C. §109(e) and has regular income (either via the business activities or from other sources, such as separate employment). Chapter 13 is not available to partnerships (although individual partners may file), corporations or LLCs that operate businesses.

     Chapter 13 has much to recommend it over Chapter 11 if the debtor’s goal is reorganization and preservation of his or her business. For one, a Chapter 13 plan is easier to propose and confirm than a Chapter 11 plan (fewer confirmation standards, no absolute priority rule, and no disclosure statement requirement). The debtor also has the ability to stretch out and pay administrative claims and priority debt over years, rather than meeting the Chapter 11 requirement to pay such claims in full on confirmation. Other benefits include the (much) cheaper filing fee; the right to cure mortgage defaults over the life of the plan; no quarterly U.S. Trustee fee; no monthly operating reports; and no requirement that the debtor’s attorney be approved under 11 U.S.C. §327. The enhanced discharge in 11 U.S.C. §1328(a) also applies in business debtor Chapter 13 cases. 

     One possible disadvantage is the 5 year limit on plan payments; if the debtor needs to "cram down" a secured creditor's claim, the debtor has to do so within the 60 month limit on plans. See Bullard v. Hyde Park Savings Bank (In re Bullard), 494 B.R. 92 (BAP 1st Cir. 2013)(11 U.S.C. §1325 requires that the payments on a cram-down of a secured claim equal the present dollar value of the property as of the confirmation date, and that distribution on account of the claim must occur within five years).

     The “business” Chapter 13, however, has several statutes and rules that apply to it and which may be unfamiliar or “traps for the unwary” for attorneys who ordinarily file consumer Chapter 13 cases, and for individuals in business considering the Chapter 13 option. Here are the more significant issues, with the applicable statutes and rules:

·         Debtor Engaged In Business – 11 U.S.C. §1304

           §1304(a) states that “[a] debtor that [sic] is self-employed and incurs trade credit in the production of income from such employment is engaged in business”. §1304(b) allows the debtor, unless the court orders otherwise, to operate his or her business, and references the debtor’s right to use property in that business, subject to the limitations on a trustee under §363(c) (cash collateral use requirements) and §364 (limitations on incurring credit).

           §1304(c) requires the debtor in business to perform the same duties that a Chapter 7 trustee performs in §704(a)(8); those duties require the debtor to file with bankruptcy court, the United States trustee, and any governmental unit that collects or determines tax arising out of the debtor’s operation, “periodic reports and summaries of the operation of [the debtor’s] business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires.” Fed. R. Bankr. P. 2015(c)(1) is more specific; that rule requires that the debtor;

o   Keep a record of receipts and the disposition of money and property received;

o   Comply with §704(a)(8) and include a statement, if payments are made to employees, of the amounts of deductions for all taxes required to be withheld or paid for and in behalf of employees and the place where such amounts are deposited; and

o   Give notice of the case, ASAP after the petition date, to every entity known to be holding money or property subject to withdrawal or order of the debtor, including any bank, public utility company, landlord with whom the debtor has a deposit, and every insurance company which has issued a policy to the debtor having a cash surrender value payable to the debtor.

     MLBR Appx. 1, Rule 13-2(a)(2) also requires that Massachusetts Chapter 13 debtors in business submit the following to the Chapter 13 trustee:

o   Within 7 days after the petition is filed, both evidence of current and sufficient business insurance, and evidence that the debtor opened “appropriate debtor-in-possession checking accounts”.

o   Within 14 days after the petition, a profit and loss statement for debtor’s fiscal or calendar year preceding the year the case is filed, and a profit and loss statement for the period beginning at the end of the prior year and ending on the petition date.

o   Within 30 days of the close of each quarter, a statement of quarterly income and expenses incurred.

     The United States Trustee’s Handbook for Standing Chapter 13 Trustees (10/1/12) states that the Chapter 13 must monitor the debtor and his or her business to “verify that the ongoing business, while in bankruptcy, does not fall in deeper financial difficulty than at the time of the filing of the case.” According to the handbook (Section G(3)), monitoring, depending on the nature of the business, might include “the debtor meeting with the standing trustee’s business case analyst, if applicable, to review the budget, an evaluation of the debtor’s accounting systems, an on-site tour of the business premises, the requirement that periodic operating reports be filed along with bank statements, tax deposits and payment forms, and monitoring of insurance coverage.”

·         Cash Collateral Use
     
           Cash collateral does not often come up in a Chapter 13, but if: (a) your debtor is selling goods and generating accounts receivable subject to a secured claim; or (b) your debtor is collecting real estate rents from property subject to a mortgage, and the mortgage contains an assignment of leases and rents, you must – right after you file the petition -- either get the secured creditor’s/mortgagee’s permission to use the cash collateral post-petition in a stipulation, or get an order (after motion and hearing) from the bankruptcy court allowing you to use the cash collateral. 

               To accomplish either task in Massachusetts, you need to be familiar with §§363(c) & (e) (as well as the definition of “cash collateral” in §363(a) and what does and does not constitute “adequate protection” for cash collateral use); §552; Fed. R. Bankr. P. 4001(b) & (d); and MLBR 4001-2.


·         Limited Powers as Debtor-In-Possession

           Unlike Chapter 11, there is always a trustee in a Chapter 13 case. Consequently, the debtor’s powers over his or her property and in operating his or her business have limits.

o   As stated above, the debtor can seek to use cash collateral; the debtor also has the right to incur credit under the terms of 11 U.S.C. §364. This means that the debtor can “obtain unsecured credit and incur unsecured debt in the ordinary course of business” without prior court authorization, and that (post-petition) debt will have administrative claim status. 11 U.S.C. §§364(a), 1304(a). If the debtor is unable to obtain unsecured trade credit on these terms, the debtor can file a motion with the bankruptcy court to allow him or her to grant a lien on property; however, if there is already a lien on the property being offered, the debtor has to offer the existing lienholder “adequate protection” of that lien.

o   A business Chapter 13 debtor retains the right under 11 U.S.C. §363(b) to use or sell his or her assets in the ordinary course of business without prior court authorization, and to sell those assets outside the ordinary course with court authorization.

o   The debtor remains in possession of all property in the estate, except as otherwise provided in a confirmed plan. 11 U.S.C. §1306(b).

o   If the debtor’s estate has preference, fraudulent transfer or other avoidance actions, Chapter 13 is silent regarding who brings those actions. The debtor, however, can provide that he or she will pursue the avoidance actions in the confirmed plan, as permitted in 11 U.S.C. §§1322(b)(9) & (11).

·         Claims

           The business debtor has all the rights a consumer debtor has regarding the review of and objection to proofs of claim. The business debtor, however, needs to look out for administrative claims made under 11 U.S.C. §503(b)(9), which are claims for the value of goods received by the debtor within twenty (20) days before the petition date, when the goods were sold to the debtor in the ordinary course of business. Note that MLBR 3002-1 sets a deadline for such claims in Massachusetts: 60 days after the date of the §341 meeting. Business Chapter 13 debtors also need to be aware of the reclamation rights of sellers of goods to the debtor, spelled out in 11 U.S.C. §546(c).

·         Debtor in Business Subject to Chapter 13 Trustee Investigation – 11 U.S.C. §1302(c)

           Per §1302(c), the Chapter 13 trustee must perform the duties specified in §§1106(a)(3) & (4) in a Chapter 13 business case. Specifically, those duties, unless the bankruptcy court orders otherwise, are to “investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of the business, and any other matter relevant to the case or to the formulation of a plan.” Once that investigation is done, the Chapter 13 trustee must “as soon as practicable” file a statement of his or her investigation with the court (and provide a copy of such statement to any entity the court designates), “including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the debtor.”

     Section G(2)(a) of the United States Trustee’s Handbook for Standing Chapter 13 Trustees (10/1/12) states that the Chapter 13 trustee, in filling this role, might ask for:

o   Copies of Federal and State tax returns, along with all supporting schedules, for at least the two years preceding the filing;

o   Copies of financial statements furnished to a third party, such as a trade creditor or a bank, within the two years preceding the filing of the petition, including but not limited to the balance sheet, income statement and cash flow statement;

o   Current books and records of the business, including checks and check registers;

o   Monthly profit and loss statements for at least the year preceding the filing;

o   Current schedule of accounts receivable and accounts payable;

o   Current insurance policies; and

o   Lease agreements.

     The Handbook also outlines what the investigative report might address, such as: the nature and location of the business; number of employees; status of federal, state, and local tax returns and tax delinquencies; insurance; business licenses; condition of books and records; prior balance sheets and profit/loss statements; aging of accounts receivable and accounts payable; debts; work in progress; and turnover actions, if applicable.

·         Additional Work – Schedules and Statement of Financial Affairs

           Note that there are many types of business property you have to list in Schedule B, including inventory; accounts receivable; machinery and equipment; office furniture and fixtures; patents; licenses; copyrights; trade names; customer lists; and supplies. The new Schedule I, in ¶8a, requires the debtor to state his or her net income from business operations or rentals, and “attach a statement for each property and business showing gross receipts, ordinary and necessary business expenses, and the total monthly net income” (note that the new Schedule J presumes you identify all of the debtor’s business-related expenses in this statement and not in Schedule J).  The statement of financial affairs has business-related questions that must be answered by an individual debtor, located in questions 18-20. Those questions relate to inventories taken, accountants used, where books and records are kept and by whom, and who received financial statements from the debtor in the last 2 years.


·         Common Chapter 13 Provisions for Consumers and Business Debtors

           A debtor’s status as a debtor in business does not change the major aspects of Chapter 13. The debtor still has to take the pre-petition credit counseling course in order to file the case, and must take the post-petition financial management course in order to receive a discharge. The plan must be filed and confirmed pursuant to the standards in §1325, the plan cannot exceed five years in term, and the concept of “disposable income” still applies – with one twist. The debtor in business is allowed to deduct from his or her current monthly income all “amounts reasonably necessary to be expended … for the payment of expenditures necessary for the continuation, preservation, and operation of [the debtor’s] business.” 11 U.S.C. §1325(b)(2)(B).

            Summary

           If you are individual debtor who runs even a small side business (like renting out floors in your three-decker residence), the attorney you choose should have at least some passing familiarity with the business issues and how to address them (including making a determination whether you are indeed "a debtor in business" under §1304 and if those business issues do apply to your case). You should also expect to pay the attorney more for a Chapter 13 business case than you would pay for a Chapter 13 consumer case, given the additional reporting and issues involved. [1]


[1] Based on a presentation made to the Worcester County Bar Association Bankruptcy Section, on April 3, 2014. ©Kevin C. McGee