Bankruptcy Bits

New trustee regulations regarding 341 non-English translation

When attending a 341 Meeting of Creditors with non-English speaking clients, the local practice dictated that the client bring their own translator (typically a friend or family member) to translate at the meeting. Under the U.S. Trustee’s recently implemented translator service program, this practice is no longer permissible.

Specifically, the protocol is to advise the Chapter 7 trustee that translation services will be needed prior to the 341 meeting. The trustee will then arrange to call a translation service phone number(in which 171 languages are available)at the 341 meeting so that an official translator will facilitate communication between the debtor and trustee.

This service provides accuracy and integrity to ensure that the bankruptcy debtor’s testimony is accurate and honest. In addition, it alleviates the need for debtors to involve a friend or family member in their personal financial affairs.

By: Justin H. Dion, Esq.

Does it matter if a creditor gets a lien before I file bankruptcy?

If a debtor does not pay an unsecured debt, the creditor has several options. Specifically, after calling and generally harassing the debtor, the creditor may then pursue the debtor in court. If the creditor obtains a judgment against the debtor, the creditor may then look to put a lien on the debtor’s (i) bank account; (ii) car; (iii) real estate; and/or (iv) attach the debtor’s pay stub. Although a subsequent Chapter 7 bankruptcy filing will discharge the underlying debt, the debtor may wonder if the involuntary lien can subsequently be removed. Debtors will be happy to know that that the bankruptcy code provides them relief. Specifically, the code allows the debtor to file a Motion to Strip an Involuntary Lien in order to allow the debtor to get rid of the debts, keep their assets free of liens, and get a fresh financial start.

by: Justin H. Dion, Esq.

Reorganizing under Chapter 11 - giving your business some breathing room

Bankruptcy protection is not just intended individuals. Small business owners who are dealing with less credit, rising inflation and costs, and slower accounts receivables collection often face tough choices in this economy. As bills get harder to pay and collection efforts ensue, the risk of business closure increases.

In enacting chapter 11 of the Bankruptcy code, Congress concluded that it is sometimes the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were canceled.

Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In a Chapter 11, jobs may be saved, the engine of profitability is maintained rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate, the business's creditors will end up with more money than they would in a chapter 7 liquidation. All creditors are entitled to be heard by the court that is responsible for determining whether the plan of reorganization complies with the purposes of the bankruptcy law and provides for fair and equitable treatment of all parties in interest.

Some contracts, known as executory contracts, may be rejected if canceling them would be financially favorable to the company and its creditors. Such contracts include labor union contracts, supply or operating contracts (with both vendors and customers) and real estate leases. The standard feature of executory contracts is that each party to the contract has duties remaining under the contract. In the event of a rejection, the remaining parties to the contract become unsecured creditors of the debtor.

Chapter 11 is reorganization, as opposed to liquidation. Debtors may "emerge" from a chapter 11 bankruptcy within a few months or several years, depending on the size and complexity of the bankruptcy. Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time. After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court.

Among other things, creditors must vote to approve the plan of reorganization. If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed, resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.

As with other forms of bankruptcy, petitions filed under Chapter 11 invoke the automatic stay of § 362. This requires all creditors to cease collection attempts and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask the court to convert the case to a liquidation under Chapter 7 or to appoint a trustee to manage the debtor's business.

The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under Chapter 11, and the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare.

Although bankruptcy is a last resort, it can sometimes keep your business afloat during times that would otherwise cause closure.



By: Justin H. Dion, Esq.

Creditors’ committee – what to do if you are invited

One of the worst mistakes that a creditor can make is to ignore the letter or telephone call from the Office of the United States Trustee advising that the creditor is “one of the top twenty creditors,” and extending an invitation to attend a meeting for the creation of a Committee of Creditors pursuant to Sec. 1102 of the Bankruptcy Code.

The best decision that the creditor can make is to immediately contact one of the bankruptcy attorneys here at Bacon Wilson.

Contrary to popular misconception, a creditor does have rights in Chapter 11 proceedings under the Bankruptcy Code. Although creditors generally choose not to participate in the process of the administration of a case under Chapter 11 because of the time and expense, the greatest right befalls to those creditors whose claims are of such an amount as to be one of the twenty largest creditors, that unfortunate group of creditors from which a Committee of Creditors is selected.

The burden of serving as a member of the Creditors’ Committee is the most significant “right” of a creditor because it allows the individual creditor to act in concert with others on the Committee in the interest of all creditors, at the expense of the estate, without the need for individual representation.

The method of selection of a Creditor’s Committee is mandated by Sec. 1102 of the Bankruptcy Code. The Committee of no less than three, nor more than eleven is appointed by the United States Trustee from among the twenty largest creditors.

Sec. 1103 of the Code provides that a Committee may:

1. Consult with the trustee or debtor in possession concerning the administration of the case;
   
   
2. 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 such  business, and any other matter relevant to the case or to the formulation of a plan;
   
   
3. Participate in the formulation of a plan, advise those represented by such committee of such committee’s determination as to any plan formulated, and collect and file with the court acceptances or rejections of a plan;
   
   
4. Request the appointment of a trustee or examiner under Sec. 1104 of the Code; and
   
   
5. Perform such other services as are in the interest of those represented. The single, most  important decision to be made by the Committee is made on day one, immediately upon the appointment of the Committee: the selection of its counsel. The selection is made by a vote of the Committee on nominations made by the members of the Committee.
   

The attorneys in the bankruptcy and insolvency department of Bacon Wilson are experienced in the representation of Creditors’ Committee and have a distinguished record of the successful advocacy of the interests of unsecured creditors. Information concerning those cases in which the firm and its attorneys have served is available on request, as is a list of references.

We urge our clients and friends to participate in the formation of a Creditors’ Committee when invited to do so and suggest that they promptly contact the firm before attending such Committee formation meetings. Bacon Wilson and its attorneys are available to serve as counsel to any Committee. We have experienced attorneys well qualified to do so.

Receipt of notification that you are one of the top twenty creditors is an opportunity for you to participate in the reorganization process and to assure that the Committee is represented by the counsel of your choice



by: Eugene B. Berman, Esq.

Be able to count on accounts receivable

In these days of a difficult economy, accounts receivable become of ever greater importance to every business. The timely receipt of money due is the lifeblood of almost any business and frequently determines whether a business can survive. Paper profitability must be evidenced by a positive cash flow. These are the times when a business is well advised to review its credit and collection policies to assure that its accounts receivable will convert to cash.

There is a truism that is oft stated by those who deal with credit and collection issues: the collectability of an account receivable is determined at the time that the account is created. The importance of an up-to-date, signed and dated credit application is imperative. Indeed, credit applications should be reviewed regularly to assure that they are current.

Equally important is knowing and confirming the legal identity of the customer...is it an individual, corporation, partnership, LLP, LLC, Trust or other legal entity? We recommend that creditors regularly review checks received from their customers to compare the name of the entity on the check to the name of the customer. Frequently customers change their legal identity without notifying their creditors. Additionally, it is recommended that creditors regularly make and retain copies of checks received in payment of an account and note the name of the bank and the account number. The information can be valuable for future use.

The creditworthiness of the party to whom credit is being extended is a major element in determining to whom credit should be extended. There are new sources from which financial information can be obtained, and there are new credit scoring techniques that can serve as tools in determining who qualifies for the extension of credit. These are times when credit granting policies should be reviewed, and if necessary, revised to be consistent with the realities of the present marketplace.

While creditworthiness is the standard, there are ways in which a business' market can be expanded by utilizing credit protections that enhance collectability and that allow for sales on other than only an unsecured basis. Those in the construction industry should be well aware of the benefits of protecting payment by filing a lien.

In other industries and in general, there are other devices that can be utilized at the time of the transaction to assure payment of accounts receivable, i.e. requiring personal or third party guarantees, taking of a security interest in the items being sold, obtaining a pledge of other collateral or requiring a bank Letter of Credit. Indeed, accepting payment by credit card is a growing practice in business-to-business transaction. There are a number of devices that enhance the collectability of an account receivable. These are the days that the availability of such alternatives should be revived and considered.

In addition to those internal devices available to a business, factoring, accounts receivable financing and credit insurance are alternatives that are available to credit grantors. Lenders are ready, willing and able to customize packages to meet the needs of their clients. Credit insurance, for example, may be purchased for all accounts or for a single account. (Indeed, shopping for credit insurance is a not so subtle way to verify the financial strength of an account or accounts.)

We have been surprised to learn that in business-to-business transactions credit card companies and credit card processors allow the use of a credit card to pay a past due account. There are advantages to accepting credit card payments, but that is for a future blog post.

When it is determined that collection activity is required to collect a delinquent account, prompt, immediate action is recommended. The applicable axiom of attorneys specializing in the collection of commercial accounts is that collectability is determined at the time the account is placed for collection. The lesson to be learned is to diligently and promptly pursue efforts to effect collection.


By: Eugene B. Berman, Esq.

Reaffirmation timing under BACAPA

It is important to remember that BAPCPA did not change the provision that a debtor may rescind a reaffirmation agreement the later of (i) sixty (60) days from the date such reaffirmation agreement has been filed with the court, or (ii) the date the court issues the discharge order.

The grounds for setting aside reaffirmation agreements are limited after the time to rescind has expired. Reaffirmation agreements are not favored by bankruptcy courts and are strictly construed based on conventional contract principles.

After the time to rescind had expired, Courts have failed to allow recession. In the case of In re Curcio, 242 B.R. 192 (Bankr. S.D. Fla. 1999), the court rejected a Chapter 7 debtor's request to rescind a reaffirmation agreement after the entry of the agreement and after the finding that it would not impose undue hardship. The Court held that the agreement becomes enforceable to the same extent as if the Debtor had never filed for bankruptcy relief and that the Court was powerless to set aside the agreement.

See also In re McCrelass, 141 Br. 223 (Bankr. N.D. Fla., 1992,) in which the Court held that a reaffirmation agreement could not be rescinded after the time period even though there was a finding. After the expiration of the time to rescind the agreement, that continued performance under the agreement would impose an undue hardship on the debtor.

In sum, the time for reaffirmation remains very limited. A creditor cannot obtain a reaffirmation before a bankruptcy petition is filed because any pre-petition waiver of a bankruptcy discharge is against public policy and unenforceable. A creditor cannot obtain a reaffirmation after the discharge has been granted, because that is unenforceable. The only time to obtain the reaffirmation is between the filing of the petition and the granting of the discharge. Seeking a reaffirmation with the debtor before the discharge is entered is not considered a violation of the automatic stay unless the creditor harasses the debtor.

By: Justin H. Dion, Esq.

Reaffirmation requirements under BACAPA

Reaffirmation agreements must be approved by the Court or the agreement is void. BAPCPA included a substantial overhaul of the reaffirmation process. The overhaul is largely accomplished by expanding the scope of disclosures that creditors must make to debtors before the parties enter into their agreement. Section 524 of the New Bankruptcy Code now requires that all reaffirmation agreements contain extensive new disclosures detailing:

• The rights of the Debtor
• Specifying the amount of debt reaffirmed
• The annual percentage rate, which must distinguish between an extension of credit under an “open credit plan” and an extension of credit not issued under an “open credit plan.” The annual percentage rate section also contains an optional section that may be used to detail various repayment schedules.
• When payments will begin
• Filing requirements with the court
• The right to rescind
• The debtor is required to complete and execute a Debtor’s Statement in Support of Reaffirmation Agreement regarding the reaffirmation agreement. If the debtor is acting without an attorney in the context of a reaffirmation agreement with a creditor, court approval of the reaffirmation agreement is required after a hearing. And;
• A certification signed by the attorney that the agreement does not impose an “undue hardship” on the debtor, or if it does present undue hardship, that circumstances exist that permit the debtor to overcome the hardship.
  

By: Justin H. Dion, Esq.

Fighting predatory lenders – MA Attorney General files preliminary injunction against Fremont General

Attorney General Martha Coakley’s Office obtained a preliminary injunction in a case against California-based Fremont General and Fremont Investment and Loan (“Fremont”,) a subprime lender that originated thousands of loans in Massachusetts. The February 26, 2008 press release states as follows:

“We are pleased by the Court’s decision and the relief it will offer to homeowners and communities suffering from the effects of Fremont’s loans,” said Attorney General Coakley. “This decision shows again that in many cases, irresponsible and unlawful lending practices caused this foreclosure crisis. We intend to hold accountable those who allegedly engage in unlawful lending conduct.”

Under the terms of the injunction, Fremont must provide the Attorney General’s Office with at least a 30-day notice of all foreclosures it intends to initiate for the approximately 2,200 loans that Fremont still owns and services, and allow the Attorney General an opportunity to object to the foreclosure going forward. If Fremont has issued a loan that is considered “presumptively unfair,” and the borrower occupies the property as his or her principal dwelling, the Attorney General has 45-days to object to the foreclosure. A loan is “presumptively unfair” if it possesses the following characteristics:

• The loan is an adjustable rate mortgages with an introductory period of three years or less
• The loan has an introductory or "teaser" interest rate that is at least three percent lower than the fully-indexed rate (the relevant index at the time of origination plus the margin specified in the mortgage note)
• The borrower has a debt-to-income ratio (the ratio between the borrower's monthly debt payments, including the monthly mortgage payment, and the borrower's monthly income) that would have exceeded 50% if Fremont had measured the debt, not by the debt due under the teaser rate, but by the debt due under the fully-indexed rate; and
• Fremont extended 100% financing or the loan has a substantial prepayment penalty or penalty that lasts beyond the introductory period.
  

After the notice and objection process, Fremont may only proceed with a foreclosure to which the Attorney General objects if Fremont files a request with the Court, the Court reviews the matter and agrees that a foreclose is appropriate. In considering whether to allow the foreclosure, the court will consider, among other factors, whether the loan is unfair and whether Fremont has taken reasonable steps to work out the loan and avoid foreclosure. The preliminary injunction does not release borrowers from their monthly mortgage obligations.

In granting the preliminary injunction, the Court found that it was unfair for Fremont to make loans where Fremont reasonably expected borrowers to default on the loans after the initial introductory interest rates adjusted. In some instances, Fremont also offered these same borrowers 100% financing, gravely increasing the risk of default if they were unable to obtain refinancing if the market value of their homes declined.

The borrowers’ risk of default was further heightened by Fremont’s substantial prepayment penalties that required borrowers to immediately obtain refinancing after their introductory rates ended. The Attorney General’s Office filed suit on October 5, 2007, in Suffolk Superior Court against Fremont and its parent company, Fremont General Corporation based on the defendant’s unfair and deceptive loan origination and sales conduct.

The complaint specifically alleges that the company was selling risky loan products that it knew were designed to fail, such as 100% financing loans and “no documentation” loans. The complaint further alleges that the company sold these loans through third party brokers and provided financial incentives to these brokers to sell high cost products. In addition to injunctive relief, the Attorney General’s Office is seeking civil penalties and restitution.

By: Justin H. Dion, Esq.

Late filing of proof of claim may cost you money

In many bankruptcy cases, you will receive a notice that proofs of claim need not be filed at the time you get the letter, as the case appears to be a “no asset” proceeding. However, in a case where assets are found by the Trustee, or reasonably expected to be found, the Court and the Trustee may send you a subsequent notice, requiring that all creditors file an official Proof of Claim with the Bankruptcy Court by a certain date (the “Bar Date”).

If you do not comply with this filing deadline, your claim will likely be considered as filed too late to share in any distribution of funds to the pool of creditors whose allowed claims were timely filed. The claims which are timely filed and not disputed as to amount will be paid on a pro rata basis, but unfortunately you will be left on the sidelines watching the money go to them, and none to you.

Notwithstanding this, some Courts will carve out an exception to the rule, allowing a late filing due to “excusable neglect”. However, this is a hard hurdle to clear, as illustrated in the recent case of In re J.S. II, LLC, et al, 49 BCD 152 (Bankr. N.D. Ill, 2008).

In the J.S. case, the Bankruptcy Court denied the creditor’s motion for permission to file a late proof of claim. Citing the decision of Pioneer Investment Services Co v. Brunswick Associates, LP (24 BCD 63 (U.S. 1993), the Court ruled that the creditor would not be permitted to claim ignorance of the legal requirements of a bar date, or that it be excused due to its decision not to obtain legal representation to understand the meaning of the notice that it had received from the Bankruptcy Court. In this decision the Court reviewed the factors that sometimes influence a Court to vary the late filing prohibition, but said that the creditor failed on all accounts.

1. The first factor was the danger of prejudice to the other creditors. Here the creditor’s late claim was three times larger than the median claim, so that mitigated against allowing the late filing.
2. Next, the Court considered the length of the delay and its impact on the Court’s proceedings. While only about 70 days late, the Court felt that this was a “draw” between the Creditor and the Debtor.
3. The third factor was the reason for the delay. This is where the Creditor took its worst beating. The Court stated that once the creditor got notice of the bar date, and made the fatal decision not to either investigate or properly file their claim, not to even consult with legal counsel, that was a fatal error of judgment, and that tipped the scales in favor of not allowing a late filing of the creditor’s proof of claim.

By: Michael B. Katz, Esq.

Beware - creditors who join together to seek an involuntary bankruptcy petition may be jointly liable for both actual and punitive damages

Most creditors are aware that under Section 303 of the Bankruptcy Code they can commence an involuntary bankruptcy petition under either Chapter 7 or 11. To do so, three or more creditors who hold non-disputed bona fide claims of at least $12,300 in excess of any liens on the debtor’s assets can join together to file the involuntary petition.

If there are less than twelve creditors in total, only one or more creditors holding undisputed claims of the same aggregate amount can also file the involuntary petition. Creditors other than the original petitioning creditors are allowed to join in the petition.

The trap for creditors now is that in the event that the debtor contests the validity of the involuntary filing, and prevails, the Court may grant judgment against the petitioners for costs, reasonable attorneys fees for the debtor’s defense, plus if “bad faith” is found, also award an amount to pay any damages proximately caused by the filing, as well as punitive damages.

In a recent case decided by the Circuit Court of Appeals, Sofris vs Maple-Whitworth, Inc, et al, 48 BCD 245 (Bankr 9th Cir, 2007), the Court addressed the issue not of liability, but of the right of the losing party to seek contribution from other creditors who were not specifically named in the action seeking damages for the wrongful involuntary petition. In that case, the debtor recovered $42,257 from one creditor, and the creditor thereafter sought the right to apportion the liability among other petitioning creditors, who were not sued by the debtor. In this case there were five initial petitioning creditors, but subsequently, eleven other petitioning creditors were added.

The Bankruptcy Appellate Panel upheld the ruling of the Bankruptcy Judge that the debtor is not required to seek damages against all of the petitioning creditors, and turned down the defendant’s position that they should only be liable for their pro rata share of the judgment, and went into a lengthy discussion of the rights of those named to thereafter seek contribution amounts from the other creditors, but in separate legal actions.

What is the lesson to be learned here?

1. First, it is often not a wise decision to be a petitioning creditor in an involuntary bankruptcy, unless you are certain of the facts and the existence of insolvency, and that the reward greatly exceeds the risk.
   
2. Secondly, if you are going to join an involuntary, you should insist on either written indemnification from the lead player, or at least an agreement to share pro rata if there is a bad faith filing determination later on in the case.
3. Finally, it rarely makes sound business sense to join an involuntary petition, where there is already a sufficient number of petitioning creditors. Too often it is done as a show of “force” against the debtor, seeking to make it surrender the fight, and to seek to impress the Court with the depth of insolvency of the debtor, thinking that if three petitioners are adequate, ten must be better.

It is suggested that you as a creditor are far better off to stay out of the legal battle and sit on the sidelines, rather than to risk punitive damages for an ill-advised involuntary petition.

By: Michael B. Katz, Esq.