Bankruptcy Bits

What are the big 3 auto makers hiding from the public in their quest for a bailout?

The efforts by the big three automakers to obtain a bailout – a loan – from the federal government, have an agenda that is not openly discussed: the social-economic significance and/or consequences of bankruptcy. Unfortunately the real issues involved in the efforts by General Motors, Ford and Chrysler are a hidden agenda to the public face, with efforts to obtain federal funds.

It is no accident that both management and labor have joined together to seek a bailout rather than to file for protection under the provisions of Chapter 11 of the Bankruptcy Code, which exists for resolving the very situations now facing the automobile industry. Why? One may ask.

The answer is rather simple once one looks past the rhetoric of “too big to fail,” etc. In a proceeding under Chapter 11, management is subject to review, stock ownership is subject to being superseded, and union pension funds and contracts are subject to rejection.

None of these sacred cows are subject to scrutiny in the type of bailout that has been requested. Indeed, even the demands for assurances of viability by the Democrats will put management, stock ownership and union contracts on the table.

There are pros and cons to pursuing either of the alternatives. A federally funded bailout would preserve the vested self-interests of management, shareholders and the unions. For GM or any of the big three to file would undoubtedly result in a rejection of the union contracts and result in a dramatic realignment of the wage scale in American industry. If it is true that the automobile industry would be more competitive if it did not have to pay taxes, how much more competitive would it be if it did not have to pay American standard wages to its employee?

It is no surprise that the Mitt Romneys of the world advocate for a filing. There are those who profit at the dismemberment of American businesses. There are Bain Capitals ready, willing, and presumably able to take over even giants like GM, and do what they do so well to the detriment to the target, and to their own profit.

Who says that determining if and when to file Chapter 11 is easy?  Sometimes the choices have consequences greater than those involving one company or even one industry. There are economic, political and societal consequences that must be considered.



by: Eugene B. Berman, Esq.

Bankruptcy filing statistics for the 12 months ending 6-30-08

In the District of Massachusetts, a total of 15,047 bankruptcy cases were filed in the 1-year period commencing on 6-30-07 and ending on 6-30-08.  In breaking down those numbers, a total of 10,643 cases were filed under Chapter 7; 154 cases were under Chapter 11;  3 cases were filed under Chapter 12;  and 4246 were Chapter 13 cases. 

In examining the breakdown of those cases between consumer and business cases, only 334 cases of the total were for businesses, and of those cases, they were distinguished into 184 Chapter 7, 134 Chapter 11,  3 Chapter 12 and  12 Chapter 13 cases.

Filings in every category but Chapter 12 and Chapter 11 remain strong, and it is expected that this quarter, ending 12-31-08, will show a growing number of cases being filed. The increase in filings is expected to continue to increase through 2009.


by: Michael B. Katz, Esq

HUD changes policy on offering loss mitigation to bankruptcy homeowners

In an effort to assist homeowners facing foreclosure, the US Department of Housing and Urban Development (HUD) recently issued a Mortgagee Letter (Number 2008-32) that altered a policy that generally prohibited mortgagees from offering loss mitigation to a borrower in bankruptcy.

That guidance was predicated on the concern that HUD did not want to influence mortgagees to take any action that would be considered by the Bankruptcy Court as a violation of the automatic stay. “The Department was recently approached by the mortgage industry and bankruptcy experts regarding the Department’s current guidance on mortgagors in bankruptcy.

As a result of these discussions, the Department understands that contact with debtor’s counsel or a bankruptcy trustee does not constitute a violation of the automatic stay and that waiting until a bankruptcy is discharged or dismissed before offering loss mitigation may be injurious to the interests of the borrower, the mortgagee and the FHA insurance funds.

Effective immediately, mortgagees must, upon receipt of notice of a bankruptcy filing, send information to debtor’s counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information. Working through debtor’s counsel, mortgagees may offer appropriate loss mitigation options prior to discharge or dismissal, without requiring relief from the automatic stay, and in the case of a Chapter 7 bankruptcy, without requiring re-affirmation of the debt. It is strongly recommended that the bankruptcy trustee be copied on all such communications. All loss mitigation actions must be approved by the Bankruptcy Court prior to final execution.

 

by: Justin H. Dion, Esq.

State court judgment for sexual harassment found to be nondischargeable in subsequent bankruptcy filing.

The US Court of Appeals in the 8th Circuit has ruled in the case of Sells vs Porter (50 BCD 124) that that they would uphold the Bankruptcy Court's determination that the injured employee's state court judgment against her bankrupt employer was a nondischargeable debt under Section 523(a)(6) of the Bankruptcy Code.

In this case, the plaintiff female employee was sexually harassed by another owner of the business, but the harasser's partner, who later filed bankruptcy, knew of the actions, and increased the problem by both condoning the actions and subsequently retaliating against the employee by firing her for complaining about the actions.

The partner who filed bankruptcy expected that he would be able to avoid liability by obtaining a Chapter 7 discharge of the damage claim, but was found by the state court jury to have acted willfully and maliciously against the plaintiff in threatening to fire her unless she signed a written document that stated that the activities that occurred were of a "consensual nature."

Here, both the Bankruptcy Court and the US Court of Appeals determined that the case had been "actually litigated" and that they were going to use the doctrine of collateral estoppel to determine that the elements of making this award non-dischargeable had been met by the injured party, and therefore the debtor could not use the bankruptcy filing to avoid personal liability for the awarded damages.


By: Michael B. Katz, Esq.