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Posts Tagged ‘Bankruptcy’

COVID-19: Bankruptcy and its Impact on Managing Risk

Posted on: April 7th, 2020

By: Jake Carroll

In the wake of COVID-19 and the now-present economic uncertainty, individuals and companies may be considering the impacts of bankruptcy. While bankruptcy can offer certain protections, including delayed payments, discharge of some debts, and a general “fresh-start,” not all debts are dischargeable, and certain obligations could survive after the bankruptcy.

The decision to file for bankruptcy relief, or seek alternative asset protection, can be dependent on several factors, and should not be undertaken without seeking legal counsel, as well as the advice of financial advisors and other risk management professionals. A hasty or poorly-reasoned decision can have negative impacts on many business and personal rights, and limit other options for debt relief or reorganization. FMG’s April 9, 2020 Webinar, COVID-19’s Cascading Impact on Corporate Finances and Loan Obligations (click here to register), will address these issues in greater detail. In the meantime, FMG has prepared a list of Frequently Asked Questions and answers addressing bankruptcy issues below:

  • What is bankruptcy?  Bankruptcy is a general term used to describe proceedings in federal court in which consumers and businesses make seek to delay or reduce their payments, shed debt, and repay creditors only on specialized terms or conditions.
  • Who can file for bankruptcy? As long as you meet certain eligibility criteria, and have not recently filed for bankruptcy, relief may available for both individuals and businesses.
  • Is bankruptcy the same as a receivership? No, although they are similar proceedings.  Receiverships are primarily governed by state laws and involve liquidations of assets by an appointed receiver under court supervision.
  • What are the different bankruptcy “Chapters,” and what is the Importance? Chapters 7, 11, and 13, are the most common types of bankruptcies, and refer to three different Chapters of the Bankruptcy Code, Title 11 of the United States Code. Each Chapter applies to a different situation:
    • Chapter 7.  Chapter 7 bankruptcies are liquidation proceedings for businesses and individuals. In a Chapter 7 proceeding, property is typically sold in order to pay back debts based on secured priorities and formulas determined by the Court.
    • Chapter 11. Chapter 11 bankruptcies are normally used by struggling businesses as a way to get their affairs in order and pay off their debts, while ultimately retaining control of the company. Some individuals may also file for Chapter 11 when they are not eligible for Chapter 13 or own large amounts of non-exempt property (like several homes)..
    • Chapter 13.   Chapter 13 bankruptcies, like Chapter 11, are also used for “reorganizations,” but will involve the appointment of a trustee who can control personal and corporate decisions.   In Chapter 13, a debtor may be allowed to keep some property, but must submit and stick to a plan that will allow repayment of some or all debts within three to five years.
  • What is the automatic stay? The bankruptcy court offers certain protections to debtors during bankruptcy proceedings, the first of which is an “automatic stay” that prohibits creditors from taking action against you or your assets without further order of the Court.
  • What do I do if I receive a notice of a bankruptcy from someone who owes me money? Given the relatively quick pace and potentially significant impacts bankruptcy proceedings can have on outstanding debts, you should contact your attorney or seek legal counsel as soon as possible to ensure your rights are protected, and that all necessary forms are filed to protect your financial interests in any recovery.

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis. Topics include COVID-19’s impact on finances and loans, the FFCRA, the CARES Act and more. Click here to view upcoming webinars.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.** 

A Dishonorable Discharge – Debt Collection, Contempt, and Efforts to Loosen the Bankruptcy Discharge

Posted on: May 23rd, 2019

By: Matthew Weiss

On April 24, 2019, the United States Supreme Court held oral argument in Taggart v. Lorenzen (In re Taggart), 888 F.3d 438 (9th Cir. 2018), cert. granted, 139 S. Ct. 782 (2019), a case addressing the standard for contempt where a creditor attempts to collect against a debtor whose pre-petition bankruptcy debts have been discharged. At issue is whether a creditor who violates a bankruptcy discharge injunction can avoid contempt where it had a good faith belief that the discharge was inapplicable to it. While the facts in that case are narrow, the Supreme Court’s decision in Taggart could have far-reaching implications for creditors who attempt to collect on debts following a bankruptcy.

The case began when real estate developer Bradley Taggart transferred his 25% interest in Sherwood Park Business Center, LLC (SPBC) to his attorney John Berman. Terry Emmert and Keith Jehnke, who also owned 25% of SPBC, filed suit against Taggart and Berman in Oregon state court asserting that the transfer breached SPBC’s operating agreement because Taggart failed to provide the required notice to Emmert and Jehnke so that they could exercise their right of first refusal. The lawsuit sought attorneys’ fees as permitted under the operating agreement.

Taggart subsequently filed a chapter 7 bankruptcy petition, staying the state court action. Following Taggart’s discharge, the state court action proceeded during which time Taggart was deposed.  The state court ultimately entered a judgment against Taggart and Berman and unwound the transfer of Taggert’s interest. Emmert and Jehnke then filed an application for attorneys’ fees against both Berman and Taggart, specifically seeking fees from Taggart arising after the date of Taggart’s bankruptcy discharge. In response, Taggart moved for the bankruptcy court to reopen his case and then filed a motion seeking to hold Jehnke, Emmert, and SPBC (collectively “Taggart’s creditors”) in contempt.

The bankruptcy court held Taggert’s creditors in contempt after finding that they had knowingly violated the discharge injunction by seeking attorneys’ fees even though they had a subjective good faith belief that the injunction did not apply to them. On appeal, the Ninth Circuit reversed the decision of the bankruptcy court, noting that “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim,” because Taggert had “returned to the fray,” precluded a finding of contempt “even if the creditor’s belief is unreasonable.”  Therefore, the bankruptcy court abused its discretion when it found that Taggart’s creditors knowingly violated the discharge injunction. Taggert’s petition for writ of certiorari with the United States Supreme Court was granted in January, and oral argument was held last month.

Taggart is significant because, if the Supreme Court affirms the Ninth Circuit, creditors will have significantly more leeway to pursue debts following a bankruptcy discharge without fear of being held in contempt so long as they have a “good faith” belief that the injunction does not apply to them, even when their sincerely held belief is unreasonable. While watering down the protections of the Bankruptcy Code’s discharge injunction may provide relief to creditors, it will surely create headaches for discharged bankruptcy debtors who may see increased efforts at collection activity.

If you have any questions or would like more information, please contact Matthew Weiss at [email protected].

Come See the Debtor Side of Sears – Legal Issues for Creditors

Posted on: November 7th, 2018

By: Matthew Weiss

On Monday October 15, Sears Holdings filed for Chapter 11 bankruptcy in the Southern District of New York, claiming approximately $7 billion in assets and $11 billion in liabilities. The bankruptcy of what was at one time the nation’s largest retail company is anticipated to result in the closing of 142 of Sears’ remaining stores before the end of the year.  It is believed that Sears currently has more than 100,000 creditors.

It remains to be seen whether Sears will be able to successfully reorganize, or whether it will suffer the same fate as other recent retailers in bankruptcy such as Toys-R-Us and be forced to liquidate its assets. As Sears’ substantial debts are sorted out, creditors and vendors of the retailer should keep the following in mind to preserve their interests:

Reclamation Demands: Vendors may issue reclamation demands on Sears pursuant to section 546(c) of the Bankruptcy Code, which authorizes a seller of goods to reclaim those goods if the debtor received them while insolvent, within 45 days before the commencement of a bankruptcy case. Because Sears has been legally insolvent for a long time, all vendors who have provided goods to Sears within 45 days of the bankruptcy filing (since September 1, 2018) have the ability to demand the reclamation of those goods by filing a written notice with the bankruptcy court.

Clawback Claims: Creditors are actively investigating whether claims exist against Sears’ former CEO, Eddie Lampert, for engaging in improper transactions involving the debtor. Lampert has had interests on both sides of transactions involving Sears in recent years and remains the Chairman even though he has resigned as CEO. For example, he is also the chairman of Sears’ real estate spinoff entity, Seritage Growth Properties, which acquired the real estate on which 230 Sears and Kmart stores are located (valued at $2.7 billion) and now collects rent from those stores. Additionally, Lampert individually and through his hedge fund, ESL Investments, Inc., has loaned Sears $2.66 billion through a variety of financing transactions.  These transactions have allowed Lampert to control the terms of the financing arrangements and benefit from interest payments by Sears. Thus, creditors will attempt to argue that Lampert deliberately stripped Sears of its assets through fraudulent transfers. The Official Committee of Creditors will likely argue that these assets should be clawed back into the bankruptcy estate pursuant to section 548 of the Bankruptcy Code.  Under relevant Delaware law, creditors have four years to assert fraudulent transfer claims and they must prove both that Sears was insolvent at the time the transactions occurred and that it did not receive reasonably equivalent value for the transfers. Other claims could be asserted against Lampert, including fraud and shareholder derivative suits for breach of fiduciary duty, although those will be harder to prove. Lampert and other directors have already settled four lawsuits involving the creation of Seritage Growth Properties for approximately $40 million.

Low Priority Creditors: After Sears’ secured creditors and prior creditors are paid, the remaining creditors, including unsecured vendors, service providers, shareholders, and pensioners, will have to fight over whatever assets remain.  Sears’ largest unsecured creditor is the Pension Benefit Guaranty Corp., a federally chartered corporation that insures pensions. PBGC claims that Sears underfunded its pension obligations by $1.5 billion.

Sears has also said that it will continue paying employees’ wages and benefits, honoring member programs, and paying vendors and suppliers in the ordinary course of business for all goods and services provided on or after the date of the bankruptcy filing. Sears specifically has said that customer loyalty programs, warranties, protection agreements, and guarantees would continue for the time being. Nonetheless, because Sears has only received $300 million in debtor-in-possession financing, there is a looming threat that the debtor will be forced to liquidate, which could shut down the entire business as a going concern. Therefore, vendors and customers should be wary about continuing to do business with Sears and Kmart until they appear to be on more solid financial footing.

For more information, please contact Matthew Weiss at [email protected].

En Banc Eleventh Circuit Decision May Substantially Undermine Judicial Estoppel Defense

Posted on: November 17th, 2017

By: William H. Buechner, Jr.

A  decision recently issued by the Eleventh Circuit sitting en banc may substantially undermine the judicial estoppel defense in employment cases.

A judicial estoppel defense may arise in many contexts, but the most common scenario is when the plaintiff files for bankruptcy, denies under oath the existence of any actual or potential claims on the bankruptcy schedules, obtains relief (either a complete discharge or confirmation of a reorganization plan) and then pursues (or continues to pursue) the claims that the plaintiff failed to disclose.  Under circumstances such as these, courts may bar a plaintiff from pursuing these claims, on the ground that such conduct makes a mockery of the judicial system by denying the existence of claims in one judicial forum and then pursuing those claims in another forum.  Courts also recognize that such conduct would permit the plaintiff to enrich himself to the detriment of the plaintiff’s creditors.  We have asserted the judicial estoppel defense successfully to defeat a number of employment claims.

In order to apply judicial estoppel, the defendant must establish that the plaintiff intended to make a mockery of the judicial system.  The Eleventh Circuit previously had held that a district court may infer this intent if the plaintiff knew about the omitted claim and had a motive to conceal it (which the plaintiff almost always does).  In Slater v. United States Steel Corp., 871 f.3D 1174 (11th Cir. 2017) (en banc), the Eleventh Circuit reversed the dismissal of the plaintiff’s race and sex discrimination claims on the ground of judicial estoppel.  In doing so, the Eleventh Circuit overruled the precedent summarized above and held that the court should consider all the facts and circumstances of the case in deciding whether the plaintiff intended to make a mockery of the judicial system. Id. at 1185.  The Eleventh Circuit explained that the district court may consider factors such as (1) the plaintiff’s level of sophistication; (2) whether the plaintiff has corrected the non-disclosures and if, so, under what circumstances; (3) whether the plaintiff informed his bankruptcy attorney of the claim before filing the bankruptcy disclosures; and (4) whether the trustee or the creditors were aware of the claim before the plaintiff amended the disclosures. Id.

In announcing this totality of circumstances approach, the Eleventh Circuit suggested that, if the bankruptcy court allows the plaintiff to re-open the bankruptcy case to disclose the previously omitted claim, this factor may weigh against the application of judicial estoppel. Id. at 1186-1187.  In addition, the Eleventh Circuit resolved an intra-circuit conflict and held that judicial estoppel should not be applied in Chapter 7 cases where the claim belongs to the trustee, unless the trustee (rather than the plaintiff) fails to disclose the claim with the intent to make a mockery of the judicial system. Id. at 1184-1185, 1188 n.16.  Of course, a bankruptcy trustee seldom, if ever, engages in such conduct.

The Eleventh Circuit’s decision follows similar decisions in the Sixth, Seventh and Ninth Circuits, whereas the Fifth and Tenth Circuits continue to hold that the plaintiff’s intent may be inferred if the plaintiff knew about the omitted claim and had a motive to conceal it.  Given this circuit split, it is possible that the Supreme Court may address this issue at some point in the future.

Absent intervention by the Supreme Court, it may be much more difficult for employers in the Eleventh Circuit to prevail on a judicial estoppel defense as a result of the Slater decision.

If you have any questions or would like more information, please contact Bill Buechner at [email protected].

Repaying Old Debts – The Supreme Court Limits FDCPA Liability for Scheduling Time-Barred Claims in Bankruptcy

Posted on: October 9th, 2017

By: Matthew M. Weiss

Earlier this year, the Supreme Court handed a victory to debt collectors when it held that the scheduling of a time-barred claim in bankruptcy was not a violation of the Fair Debt Collection Practices Act (FDCPA).

In Midland Funding, LLC v. Johnson, Aleida Johnson filed for personal bankruptcy under Chapter 13 of the Bankruptcy Code in the Southern District of Alabama. Midland Funding, LLC (Midland) filed a proof of claim asserting a credit card debt of $1,879.71. Johnson’s last charge on the account was in 2003, more than 10 years before Johnson’s bankruptcy filing, even though Alabama’s statute of limitations on the collection of debts was six years. Johnson objected to the claim and it was disallowed. Johnson then brought suit against Midland seeking actual damages, statutory damages, attorneys’ fees, and costs for a violation of the FDCPA, 15 U.S.C. § 1692k. After the district court determined that the FDCPA was inapplicable and dismissed the lawsuit, the Eleventh Circuit Court of Appeals reversed the decision, and Midland appealed to the Supreme Court.

In a 5-3 decision (with Justice Gorsuch abstaining), Justice Breyer, writing for the majority, first determined that a claim under the Bankruptcy Code was a “right of payment”, and that a creditor has the right to payment of a debt even after the limitations period expires. The Court also noted that a claim does not automatically have to be enforceable. Further, the definition of claim under the Bankruptcy Code provided that the claim could be “contingent” or “disputed”. Additionally, the Court found that the running of the statute of limitations was meant to be asserted as an affirmative defense by the debtor after the creditor asserted a claim.

Turning to whether the filing of a time-barred claim was “unfair” or “unconscionable” under the FDCPA, the court distinguished bankruptcy from civil cases in which creditors were subject to FDCPA liability for bringing suit on time-barred claims because “a consumer might unwittingly repay a time-barred debt” in a civil case. The Court reasoned that unlike civil cases, the consumer initiates bankruptcy proceedings, and are unlikely to pay a stale claim just to avoid going to court. Additionally, the Court said that the presence of knowledgeable trustees and procedural rules provided additional protection to debtors. The Court also noted that by filing a stale claim that was subsequently disallowed, that claim would be forever discharged, removing the debt from the debtor’s credit report and “potentially affecting an individual’s ability to borrow money, buy a home, and perhaps secure employment.” For all of these reasons, the Court concluded that the filing of a stale claim in bankruptcy was not “unfair” or “unconscionable” under the FDCPA.

The Supreme Court’s decision in Midland Funding legitimizes a major tool of debt collectors, who now can freely assert time-barred claims in bankruptcy proceedings with the hope that both the debtor and the bankruptcy trustee fail to assert a statute of limitations defense. As Justice Sotomayor wrote in her dissent, because debt buyers assume that a certain percentage of old debt will be written off as uncollectible, the Supreme Court’s decision will likely make consumer debt a more valuable commodity based on the assumption that a greater percentage of that debt will be collected in bankruptcy proceedings. Sotomayor had specifically predicted that “debtor collectors may file claims in bankruptcy proceedings for stale debts and hope that no one notices that they are too old to be enforced.”

In light of the Supreme Court’s decision, bankruptcy debtors should be extra vigilant about reviewing claims filed in their bankruptcy cases to determine whether a statute of limitations affirmative defense can be asserted. Conversely, creditors should not become too comfortable because, even though the Supreme Court’s decision precludes FDCPA liability for filing time-barred bankruptcy claims, the Supreme Court expressly declined to extend its holding to creditors who assert time-barred claims outside of bankruptcy.

If you have any questions or would like more information, please contact Matthew Weiss at [email protected].