All posts in Chapter 11

How to Recover Attorney’s Fees in Preference Action

By | June 19, 2015 | Cases, Chapter 11, Chapter 13, Chapter 7 | 1 Comment

Defending against a preference action is challenging, especially more so when your client is an innocent bystander to such a draconian rule.   Unfortunately too, recovering attorney’s fees from a successful defense is not in your favor either.

Attorney’s fees are generally not recoverable for successfully defending against the trustee’s preference action because a preference action is based wholly in bankruptcy law, is unique to bankruptcy and not an action under contract law (which gives effect to attorney’s fees clause in contract).   Alvarado v. Walsh (In re LCO Enters., Inc.), 180 B.R. 567, 570-71 (9th Cir. BAP 1995), aff’d, 105 F.3d 665 (9th Cir. 1997).

Attorneys CAN recover fees in defending a preference action IF:  (cue suspense music)

Read more…

FRBP 3017: Don’t Forget To Serve the Disclosure Statement on the S.E.C.

By | June 8, 2015 | Cases, Chapter 11 | No comments

Some might overlook this, but Judge’s do note that you are required to serve the S.E.C. with your disclosure statement.

F.R.B.P.  3017, says “…the plan and the disclosure statement shall be mailed with the notice of the hearing [on the adequacy of the disclosure statement] only to the debtor, any trustee or committee appointed under the Code, the Securities and Exchange Commission and any party in interest who requests in writing a copy of the statement or plan. 

 

Triple Crown Winner, American Pharoah, Almost Repossessed During 2010 Bankruptcy Filing

By | June 8, 2015 | Chapter 11, Community, Uncategorized | No comments

Long before Triple Crown winner American Pharoah was born, he was almost repossessed.

American Pharoah came from a pair of racehorses whose unborn foals were collateral for a loan that went bad in 2010.   Stable owner, Ahmed Zayat, put his stables into bankruptcy protection and protected his horses (including unborn American Pharoah).   Before it filed for bankruptcy in 2010, Zayat Stables LLC had run up more than $38 million in debts, mostly to Fifth Third Bank, which accused Zayat of trying to dodge a personal guaranty.

The chapter 11 case temporarily halted Fifth Third Bank’s effort to repossess $37 million worth of horses, including American Pharoah’s parents, Pioneerof the Nile and Littleprincessemma.

Read more…

Revisiting Knudsen – Getting Paid in Chapter 11 Cases

By | June 6, 2015 | Chapter 11 | No comments

I have been putting together some materials for our office on Chapter 11 cases.  Section 2 of the materials will be about Employment Applications.  So I have been re-reading In re Knudsen, 84 B.R. 668 (9th Cir BAP 1988).  The Debtor’s attorneys, Stutman, Treister & Glatt, asked for permission to be paid every month without filing a fee application.  They would give notice and an opportunity to object before being paid.  Judge Barry Russell approved it over the UST objection.  The UST argued that it was never appropriate to permit payment without a fee application.  Shortly after the ruling in favor of Debtor’s counsel, counsel for the committee and the debtor’s accounting firm requested and got similar orders, now known as Knudsen Orders.

The facts seem to make it obvious that it was appropriate and that it is almost never appropriate otherwise.  In Knudsen, the fees were estimated to be in the range of $250,000 per month.  It was a liquidating case, for the benefit essentially of the secured creditor.  The secured creditor was essentially paying the fees since it was allowing payment out of its collateral.  The secured creditor authorized the fees.  There was a creditor’s committee who could watch over the fees and object if necessary.  The firm getting the fees had the ability to repay if it came to that.

Judge Deborah Saltzman commented the other day in a case before her that she has only authorized a Knudsen Order once in her tenure on the bench.

The BAP summarized its approval of Knudsen by saying:

In general, professionals must file applications for compensation which are subject to a noticed hearing prior to allowance or payment of fees. However, in the rare case where the court can make the following findings, a fee retainer procedure like the one here may be authorized:

1. The case is an unusually large one in which an exceptionally large amount of fees accrue each month;
2. The court is convinced that waiting an extended period for payment would place an undue hardship on counsel;
3. The court is satisfied that counsel can respond to any reassessment in one or more of the ways listed above; and
4. The fee retainer procedure is, itself, the subject of a noticed hearing prior to any payment thereunder.

Basic Introduction to Unsecured Creditors’ Committee

By | June 2, 2015 | Chapter 11 | No comments

This article is a quick introduction to unsecured creditors’ committees.

When an individual or company files bankruptcy, there are generally two routes it can take (for the purpose of this discussion, Chapter 13, a limited form of reorganization for individuals, is omitted.)

The first route is Chapter 7 liquidation where assets are liquidated for payment to creditors.

A Chapter 7 bankruptcy is structured as follows: a Chapter 7 Trustee is appointed; the trustee is a professional whose job is to maximize the value of the assets (referred to as the Estate) and to pay creditors as much as possible. The Department of Justice oversees the Chapter 7 Trustee. Creditors may participate in this process but since the Chapter 7 Trustee is a professional, experienced and neutral, the role of creditors is limited. They may seek to protect themselves but generally stay out of the Chapter 7 Trustee’s business.

Read more…

Not Paying a Few Creditors, After 48 months, Per Confirmed Plan is Grounds For Dismissal/Conversion (In re Warren)(Unpublished)

By | June 1, 2015 | Appeals, Cases, Chapter 11 | No comments
Debtors implemented their confirmed Plan for 52 months (8 months to go), but they  failed to pay a few unsecured creditors.   On Motion by the unpaid creditors, bankruptcy judge reopened the case, and found there was “cause” under 1112(b)(4)(N) to dismiss the case (rather than convert).
The Debtors were apologetic, and said they would immediately pay all the creditors what they are owed rather than facing the harsh consequence of a dismissal after 52 months of plan payments.  Section 1112(b)(2) allows an exception whereby if there is “unusual circumstances” to permit the court not to dismiss/convert.   Bankruptcy judge was not moved by Debtors excuses, and dismissed the case.   The B.A.P. affirmed (unpublished).
Lesson:  Road to discharge begins (not ends) at plan confirmation.
Link: http://cdn.ca9.uscourts.gov/datastore/bap/2015/05/28/Warren%20Memo%2014-1390.pdf

Postconfirmation Subject Matter Jurisdiction of Bankruptcy Courts

By | June 1, 2015 | Case Briefs, Chapter 11 | 1 Comment

A trend among Chapter 11 practitioners over the last ten years has been to use general provisions in the Plans of Reorganization they draft. They copy and paste these provisions in all their Plans, close their eyes and hope for the best.

One of those clauses is this “retention of jurisdiction” clause. Some practitioners have a bland one, “The Court shall retain jurisdiction to the maximum extent possible under the law.” To me, that means nothing. The problem is this clause is not helpful. It doesn’t tell the court specifically what it’s allowed to do and not allowed to do, inviting litigation over this issue before the merits are even considered!

Read more…

Secured Creditors Who Do Not File Continuation Statements Will Lose Their Secured Status, Despite a Bankruptcy

By | May 26, 2015 | Chapter 11, Chapter 13, Chapter 7 | 1 Comment

UCC-1 financing statements are effective for five years.  Before the five years has run, the creditor must renew the financing statement by filing what’s called a continuation statement.  This is essentially a UCC-1 with a check next to the box labeled “continuation statement.”  The only caveat is any continuation statement must be filed no sooner than six months before the five year period has expired.  Assuming a continuation statement is filed, the five year period is expanded by five years from when the original would have expired.  This can be done indefinitely.

What if the Debtor filed bankruptcy?

Read more…

Preemption and the Supremacy Clause

By | May 25, 2015 | Chapter 11, Chapter 13, Chapter 7, Community | 2 Comments

Twice in the last week I have had an attorney ask me a bankruptcy question and then comment that it seems to him that the answer is in the supremacy clause.  In other words, the federal law is bigger and better and more important and more powerful than state law so it wins.  This shows a lack of understanding of preemption and the supremacy clause.

It is constitutional law 101 that the federal government has the power to do only what the constitution gives it the power to do.  Everything else is reserved to the states.  Further, the states can do anything they want unless the constitution says they cannot or the federal government has passed a law, using a power given to it in the constitution, which is intended to preempt the field.  How do we know when congress “intended” to preempt the field?  When it says so right in the legislation or when the law it passed is so comprehensive that it leaves nothing left for the states to do.

In Sturges v. Crowninshield,  17 U.S. 122 (1819), the Supreme Court, Chief Justice John Marshall, ruled that states can pass bankruptcy laws!  At least until congress passes a law which it intends to preempt the field.  States cannot however grant a discharge of debts since the constitution says states cannot “impair the obligations of contracts.”

Most states including California have assignment for the benefit of creditors laws (“ABC”) which function very similar to bankruptcy laws.  Someone liquidates the assets for the debtor and distributes the proceeds to the creditors.   So obviously the bankruptcy act we have today, Title 11, is not a law which has preempted the field, at least completely.

States cannot however pass laws which “unreasonably” interfere with federal laws.  A state cannot pass a law for example that provides that persons who file bankruptcy must nevertheless pay their attorneys the amount owed prior to bankruptcy.  That would, in effect, amend the bankruptcy code.  Congress has decided who gets a discharge and for what.  States cannot interfere with that decision.  Congress could amend the code and say that each state can decide what debts will be discharged as it has done with exemptions.  But it has not so states must steer clear.  Why?  Because of the supremacy clause.

Two examples of this come to mind.  In Local Loan Co. v. Hunt,  292 U.S. 234 (1934), Illinois law provided that a lien could attach to future wages and we all know liens don’t go away in bankruptcy.  The Supreme Court struck down the law saying, “The … Illinois [law] is ‘precluded here by the clear and unmistakable policy of the Bankruptcy Act.’”   The effect of the law was to prevent discharges that congress intended to include.

Read more…

Nice Discussion of Critical Vendor Motions from Chief Judge Sheri Bluebond

By | May 20, 2015 | Cases, Chapter 11 | No comments

Tentative Ruling today from Chief Judge Sheri Bluebond.  I do not know how she ultimately ruled but you can see the thought process very nicely.

2:15-17527 Redondo Brothers, Inc. Chapter 11

#106.00 Debtors Emergency First Day Motion For An Order Authorizing Debtor To Pay Pre-Petition Claims Of Certain Critical Vendors Necessary For Its Continued Operations

There is no basis upon which the Court can or should authorize the payment of prepetition claims.  The concept of a critical vendor is a very narrow one that should only be applied when there is no permissible theory under which the requested amounts can be paid and it is clear that, by using property of the estate in this manner, the value of the estate is increased by more than the amount of cash that must be spent to make the payment.  The debtor has not made a sufficient record to support such payments here.  The motion reflects a debtor who did not want to bother taking the time or effort to analyze whether there are other bases upon which payments can or should be made.

Read more…

← Older Entries
Newer Entries →