The American Bankruptcy Institute's ("ABI") VOLO Project had me synopsize the Second Circuit Court of Appeals' decision in U.S.A. v. Kerr-McGee Corp. (In re Tronox Inc.).
The sixty-two-page opinion boiled down to two "holdings." They are:
a.) Claims derived through a debtor are bankruptcy estate property which only a trustee can assert;
b.) A District Court order on a contempt motion which:
1.) enforced an existing injunction; and
2.) made no contempt finding nor sanctions award was not a "final order" subject to immediate appeal.
When you're floundering in debt, having some of it cancelled or forgiven sounds great. Be careful. You may be trading a junk-yard dog for Godzilla.
To the Internal Revenue Service (the "IRS") forgiven debt creates Cancellation of Debt Income ("CODI").1
CODI is taxable unless the discharge:
(A) occurs in a bankruptcy case;
(B) occurs when the taxpayer is insolvent;
(C) is of qualified farm indebtedness;
(D) is of qualified real property business debt of anyone other than a C corporation; or
(E) is of debt from a qualified principal residence which occurred-
Over one month ago, we had a big hearing in a big fight over the following facts:
A.) There was an adversary proceeding in a chapter 11 case ("Case 1").
B.) The adversary proceeding was settled during the chapter 11 case.1
C.) The non-debtor party defaulted under the stipulation.
D.) The chapter 11 case was dismissed without preserving any entered orders.2
E.) Two years later, the same debtor filed a chapter 7 case ("Case 2").
F.) The Case 2 chapter 7 trustee is suing for the debtor's rights under the Case 1 stipulation.
We say, "No way!"
Bankruptcy relief is not a sign of failure. It expresses hope. There is life after bankruptcy. Potentially, a better life. Bankruptcy discharges are "fresh starts" for individuals to build futures, where their pasts are not repairable.
But, a debtor's past can prevent a bright, post-bankruptcy future.
Dischargeability and Discharge
Bankruptcy Code §§ 523 and 727 provide means for limiting or eliminating that fresh start. Section 523 identifies specific debts which can be excluded from discharge.
Imagine thinking you've put a bad business experience behind you, only to learn its ghost is attacking you. That's the specter of poorly planned entity chapter 7 bankruptcies. Unfortunately, most bankruptcy cases for entities which start as Chapter 7 cases suffer from this.
Prudent entrepreneurs conduct business through entities. Popular entity forms include: a.) corporations, b.) limited partnerships, and c.) limited liability companies.
Last week, I was given seven minutes for a presentation to some smaller business owners. Wondering what wisdom I could impart in that brief period, I created the following outline. They thought I should share it with the blogosphere. Hope you find it helpful.
"Any ass can make a fortune. The trick is keeping it." ~ The Sage of Centennial
1. Don't sign a guarantee you wouldn't want to pay.
2. But, get one if you can.
3. Don't take payment from someone who does not owe it to you. Get protection if you do.
We represent a debtor with a substantially younger, non-debtor spouse and equity in their home, exceeding the debtor's homestead exemption. The home is owned as tenants in the entireties. This means that the surviving spouse inherits the property free and clear of the deceased spouse's creditors. The spouse's youth dissuaded the chapter 7 trustee from trying to sell the home free and clear of both owner's interests.
The trustee got creative. She tried selling just the debtor's interest in the house. The buyer gets the right to live with the non-debtor. That right would never be used.
I've been working on returning to the blogosphere with interesting bankruptcy stuff. Unfortunately, last Sunday's presidential debate irked my military historian. So, here's my damn fact-check and opinion.
On October 9, Donald Trump criticized Hillary Clinton again for disclosing her strategy against ISIS. He said that Generals Douglas MacArthur and George Patton are turning in their graves for this disclosure. Trump wants to take the enemy by total surprise. Trump's disdain for the rule law is revealed anew.
The other day, I had a telephone call with a client we'll call Slim. Slim was worried about the impact a venture's winding up might have on his public image. His concern was that a creditor might blab to the press, which would then show him in a negative light.
Slim is an entrepreneur and, as an entrepreneur, Slim assumes the risk of failing ventures. Most fail. I assume Slim's reputation is built, in part, on his success. I also assume that his success rate is favorable.
Involuntary bankruptcy petitions may be the nuclear weapon in the commercial debtor-creditor collections arsenal. Like its military counterpart, it devastates. An alleged debtor may be crippled economically, where it was viable before the involuntary petition was filed.
To limit abuse of involuntary petitions, the Bankruptcy Code imposes onerous penalties on petitioning creditors with failing petitions. Those penalties include:
(A) costs; or
(B) a reasonable attorney's fee; or against any petitioner that filed the petition in bad faith,1 for -
We represent all the players in the debtor-creditor spectrum. So, we've developed some perspective. Sometimes the view is disheartening. A concern arises in defending the enforcement of money judgments.
When representing judgment debtors, judges have said to us "this is a federal judgment and it must be paid," or "it may not be today, it may not be tomorrow, but this judgment will be paid," or one judge thundered "a judgment should be paid." These sentiments are echoed in reported decisions.
Marx was right! "Love flies out the door when money comes innuendo."1
Unfortunately for some, money problems keep some couples together who'd rather be divorced. The issues become who pays the debt versus who keeps the couch, cat and castle.2
Bankruptcy can help divorcing couples get two fresh starts: one marital and one financial. Thanks to Congress the Bankruptcy Code Amendments of 2005 made this possible.
The "sea change" was: (a) changing domestic support obligations to first priority in payments to unsecured creditors;
When it comes to business torts, folks like calling their wrongdoers "racketeers." It's not just because it sounds evil. Claims under the federal Racketeering and Corrupt Organizations Act, ("RICO") 18 U.S.C. §1961 et seq, carry treble damages. 1
RICO: Excaliber It Ain't
However, as lethal as RICO sounds, implementing it gives it dubious value. Courts scrutinize RICO claims. One court summarized:
It has been suggested that "the civil provisions of [RICO] are the most misused statutes in the federal corpus of law . . .
Technical bankruptcy procedure can be fun. So, here goes.
Imagine two bankruptcy cases, involving the same debtor or their affiliate in two different districts (e.g., Delaware and Wyoming). It's likely that one set of interested parties (e.g., debtors, creditors, regulators) will find one of the venues inconvenient. Often, the second case's filing responds to the first case's inconvenient location.
Federal Rule of Bankruptcy Procedure 1014(b) ("Rule 1014(b)") provides a means for moving the inconvenient case to the preferred location. A motion is filed in the pending first case's district.
Until recently, New York State residents with rent stabilized apartments risked losing their homes in bankruptcy. This unhappy state ended in the recent decision, In the Matter of Mary Veronica Santiago-Monteverde. etc., (Santiago-Monteverde.")1 New York State's highest court ruled that rent stabilized leases are "public assistance benefits" which are unavailable to be converted to cash to pay creditors.
Many things precipitate chapter 11 reorganization cases. Frequently, it's a response to a judgment creditor's efforts to enforce its money judgement. Those efforts interfere with customer relations, cash flow and the judgment debtor's economic survival.
Smart judgment creditors realize that crushing their judgment debtor won't get them paid. Judgement debtors and creditors may not agree on what is destructive. That's where a chapter 11 reorganization case comes in. It stops the enforcement efforts while the judgment debtor attempts to reorganize.
On September 16, 2014, New York courts announced rules banning collecting consumer debts which were: a.) not incurred; b.) previously paid; or c.) subject to statute of limitations defenses.
The new rules require:
a.) creditors submitting affidavits for default judgments with detailed proof;
b.) that default applications contain the debtor's original credit agreement, a detailed accounting of each stop in the debt's chain of ownership and documentation that identifies the target of the default judgment as the correct debtor;
c.) an affidavit from the creditor's attorney that the statute of limitations has not expired;
d.) verification of the efforts made to notify the debtor of the impending default.
We can't overemphasize the importance of filing accurate schedules and statements in a bankruptcy case. Regardless of lawyers' skills, clients must review their schedules carefully before signing them. The recent decision in Crawford v. Franklin Credit Management Corp.1 ("Crawford") illustrates the dangers of inaccurate schedules and a lucky "escape hatch."
The foremost cause of bankruptcy filings is "medical debt." Medical salvation can yield financial ruin.
Recently, Senators Elizabeth Warren and Sheldon Whitehouse submitted the "Medical Bankruptcy Fairness Act of 2014" S. 2471 (the "Act") to the Senate Judiciary Committee.
The Eastman Kodak Company reorganization2 provided a "shot in the arm" for debtors and a shot at landlords to be reckoned with. In re Eastman Kodak Company, 495 B.R. 618 (Bankr S.D.N.Y. 2013) ("Kodak").
On June 12, 2014, The United States Supreme Court determined that Bankruptcy Code § 522(b)(3)(C) does not exempt inherited Individual Retirement Accounts ("IRAs") from creditors' claims in individual bankruptcy cases. Clark v. Rameker, 134 S.Ct. 2242 (2014).
Ms. Clark inherited her mother's $450,000 IRA in 2001. She filed for bankruptcy relief in 2010 after spending the IRA down to $300,000. Her bankruptcy schedules listed the IRA as exempt from paying her creditors' claims. Ms. Clark asserted that Bankruptcy Code § 522(b)(3)(C)'s exempting "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under the Internal Revenue Code..." protected her inherited IRA. Her bankruptcy trustee challenged the asserted exemption. The bankruptcy court granted the trustee's challenge to the exemption.
Q: I am an entrepreneur with a business in New York. My business is having problems. How do I survive?
Entrepreneurs are optimists by nature. Recognizing there's a problem is a big step in "entrepreneur rescue." Next comes identifying the problem, then how to fix the problem, and finally, how to fix the fallout the problem created.
Your accountant can help by identifying the answers to the following:
- Is it cash in, or cash out?
- What's causing the unhealthy imbalance?
- Can the cause be fixed?
- If so, how and at what cost?
- Is the cost worth it?
- If not, what then?
Cliven Bundy would like folks to think he's a big, tough, independent cowboy being run off his land by the Federales. Ain't so.
Clive Bundy was sued by our country for using our national park to graze his cattle without permission or paying for it. He was sued in May 2012, had the wisdom to represent himself, claimed that the land didn't belong to the U.S. (yeah, us), and lost that lawsuit, fair and square, in July 2013. He appealed the order directing him to move his herd off those lands, or to have the U.S. do it for him. The appeal was dismissed on January 30, 2014.