Articles Posted in Bankruptcy

Sleazy Lawyer

Gasunas vs. Yotis, 14-321 (Nov.24) ND IL ED (J. Schmetterer)

The Facts

Yotis, a former Illinois Attorney, borrowed over $50,000 from his Client Gasunas using various tricks and subterfuge: from outright lies to misrepresentations and material omissions of fact designed to manipulate his “friend” and benefactor. Once he had the money, Yotis filed a Chapter 13 Bankruptcy.

The Adversary Complaint

Gasunas fought back against the Bankruptcy by filing a 4-count Adversary Complaint challenging Yotis’ Chapter 13 discharge under a variety of statutory fraud theories under 11 U.S.C. 523(a) including

  • Fraudulent Pretenses;
  • False Representations;
  • Actual Fraud; and
  • Fraud While a Fiduciary

Yotis, in turn, brought a Motion to Dismiss the Adversary Complaint sounding in 11 U.S.C. 12(b)(6) in an effort to have his case confirmed over the objections of his former Client.

The Opinion

In a carefully written and exhaustive Opinion, Judge Schmetterer of the Bankruptcy Court for the Northern District of Illinois, Eastern Division, evaluates each of the arguments in the Motion to Dismiss and applies them to all 4 counts of the Adversary Complaint. Ultimately the Court dismissed Counts I and II without prejudice and with leave to re-plead, while Counts III and IV are allowed to stand without any changes.

Aside from the precise way in which it examines everything from the Federal Rules of Civil and Bankruptcy Procedure to the substantive law of Bankruptcy Fraud and the Relation-Back Doctrine, the Opinion is notable for its recitation of the truly underhanded things that Yotis is alleged to have done in order to weasel money from his Client, including:

+ Crying about his wife and daughter leaving
+ Claiming to need money to pay his mortgage
+ Lying about visiting his sister in an institution
+ Cajoling even while professing false friendship
+ And many other examples of how not to behave

 The Upshot

This Opinion is a solid primer and review concerning the types of Bankruptcy Fraud available through 523(a) – a mainstay of Bankruptcy litigation. Here, the fact that the Debtor was an Attorney and the Plaintiff/Creditor was his former Client simply makes the case that much more of an object lesson.

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Mortgage Application

We represent many consumers in Bankruptcy, and getting our Clients back on their feet afterwards is a big part of what we do. Often, cases are driven by upside-down home loans or even reasonable loans in which payments have become too high because the homeowner lost their job or had to take a lower paying job as a result of the Great Recession. One option for those who’ve gone through Bankruptcy and are looking to borrow again is the FHA Loan.

Before the housing bubble burst in 2008 FHA loans were considered the choice for buyers with little credit or bad credit; or an option for those with low incomes. But since everyone’s home value began falling – often taking their credit standing with it – FHA mortgages have become more widely appealing, especially when compared to conventional loans that require private mortgage insurance (“PMI”). PMI is the mortgage lender’s way of ensuring it gets paid following default. It is insurance for which the borrower pays the premium, adding to the cost of the loan.

For those considering an FHA Loan, keep these points in mind:

1) FHA Loans are Private, But Backed by the Government

FHA loans start like any other – with an application at your local bank or mortgage brokerage. Once you qualify, the loan is made by a private entity and guaranteed (i.e. insured) by the FHA. Like PMI, this is a hedge against default. In turn the FHA charges an up-front premium as well as an annual premium – both paid by the borrower. To find a list of FHA approved lenders, search the website maintained by the Department of Housing and Urban Development.

2) FHA Loans Do Nearly Everything Conventional Loans Do

Despite the popular misconception that FHA Loans can only be used to purchase modest homes, they can actually be employed for everything from buying a $600,000+ house or multifamily building to remodeling, refinancing, upgrading, and property rehab. They even come in fixed-rate and variable-rate varieties, including ARM’s.

3) Down Payments Are Lower

No-money-down financing, once the standard in real estate transactions, was welcomed at virtually every Bank before disappearing overnight in 2008. Panicked Banks quickly overreacted by putting a virtual freeze one mortgage lending altogether. When they finally did start lending again, Banks demanded 20% down or more. By contrast, an FHA loan can be arranged with as little as 3.5% down.

4) Perfect Credit Not Needed

One thing that was true about FHA Loans before the housing crash, and remains true, is this: they are still easier to obtain than conventional loans. With a credit score as low as 580 a borrower can put only 3.5% down on the purchase of a home and qualify for a mortgage. A borrower with a lower score can still get financed if they are willing to put down about 10%. And of course FHA Loans are a great choice for those who’ve filed Bankruptcy or undergone a Foreclosure in the past few years. Borrowers just need to re-establish their credit and meet other program requirements first.

5) Property Renovations Using FHA Loans

If a borrower is interested in a home that needs a little work, they can borrow enough to cover both the purchase and the rehab using a special product known as an FHA 203(k) Loan. Likewise, the FHA’s Energy Efficient Mortgage program is aimed at upgrades that lower utility bills and make the house more energy efficient. The cost of new appliances, for instance, can be part of the loan.

6) Help With Closing Costs Available

Buying property involves several inevitable out-of-pocket expenses such as Loan Origination fees, Attorneys’ fees, Appraisal costs, etc. It is often not possible for the seller, builder, or lender to pay these costs with a conventional loan: but with an FHA loan they can. For instance, a motivated seller can offer to cover closing costs like these without running afoul of the underwriting standards of an FHA lender.

7) Which Way To Go

Despite the benefits of going FHA, borrowers could still end up paying more to borrow this way compared to a conventional loan plus PMI. Of course that assumes the FHA borrower qualifies for a conventional loan. Either way, these days the premium charged by FHA in lieu of PMI is 1.75% of the loan value up-grant, plus an annual premium of up to 1.35% of the loan amount. Borrowers should talk to their mortgage adviser before deciding which way to go on this.

The Upshot

An FHA mortgage is something that many borrowers don’t even consider. If you have experienced a Bankruptcy or Foreclosure, put FHA loans on your list of ways to consider getting back into home ownership, or just as a way to improve your living conditions.

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Divorce

In re Meier (Ch. 11) )(Nov.24) 14-10105 ND IL ED (J.Schmetterer)

The Facts

Bob and Martha Meier divorced and entered into a Marital Settlement Agreement (“MSA”) that provided for $4 million in maintenance payable in monthly installments over 10 years; plus a $400,000 property settlement. Bob filed for Chapter 11 sometime later and Martha filed a proof of claim (“PoC”) in the case seeking the rest of her $4 Million as well as the $400K as a “priority as a domestic support obligation” per 11 U.S.C. §507(a)(1)(A).

The Issue

Of course domestic support obligations are exempt from discharge in Bankruptcy, and entitled to priority payment in a plan of reorganization. The tricky part however, is determining just what constitutes a “domestic support obligation” entitled to special treatment, and what does not. For instance, would a spouse’s Attorneys’ Fees be entitled to special treatment? How about interest on unpaid sums? Court sanctions for unpaid support?

The Opinion

Regardless of how much of Martha’s PoC was entitled to priority, one thing was for certain: it would definitely put a crimp in Robert’s Plan of Reorganization. So it is no surprise that Ed Shrock, one of Bob’s creditors under the Plan, objected to Martha’s PoC. According to Shrock, in order for Martha’s claim to be valid, all the domestic support obligations would have to be due at once – not the case here. By contrast, domestic support obligations due in the future like the installments here are NOT allowable claims in Bankruptcy. In response to the Ojection, Martha amended her PoC to reflect $2,333,333 as a “domestic support obligation” and $400,000 as a “property settlement.” Apprently, that amendment did not satisfy Shrock, who believed that none of Martha’s claim was entitled to priority over the debt owed to him.

Following a thorough discussion about jurisdiction, whether the disputed amount constitutes a domestic support obligation in whole or part, whether a Proof of Claim is a “judicial admission,” and the proecess by which PoC’s can be amended under Federal Law, the Court ultimately sustained Shrock’s objection as the amended $2.3 Million domestic support claim – rather than the original $2.7 Million claim – but overruled it as to the property settlement. Ultimately, Martha was left with a claim for the $400K and in potential future claims that would not mature until they were due and owing.

The Upshot

While the numbers in the Meier divorce are large and impressive, the facts and reasoning in this case apply accross the board. Domestic support is still the #1 source of exempt claims in Bankruptcy, as well as a persistent source of confusion to Family Law practitioners and their Clients.

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Bankruptcy Court Seal

Skavysh v. Katsman, No. 12 C 3807
Appeal from District Court, ND IL ED
Decided: November 19, 2014

If a Debtor intends to pay people back following discharge, are they “creditors”? Put another way: Who is a creditor in Bankruptcy?

The Issue

That was the issue in Skavysh v. Katsman, which started out as a simple Chapter 7 before Judge Wedoff in the Northern District of Illinois, Eastern Division, worked its way through the District Court, and eventually ended up before the 7th Circuit Court of Appeals. The central question revolved around when a Debtor’s omission rises to a level that is sufficient to justify denying Discharge.

The Facts

The Debtor/Appellant was an immigrant with limited knowledge of English who omitted members of her family from Schedule “F” of her Petition – unsecured creditors. These people had supported her through a nasty divorce and she fully intended to pay them back. When her step-son challenged her Discharge based on those omissions, the matter went to trial before Judge Wedoff.

In her testimony at trial the Debtor said that since she intended to pay the omitted people back they weren’t really creditors.  It isn’t hard to understand why she might think that: mom, grandma, and uncle Ed aren’t the same as Visa and American Express, after all. And they’re the real “creditors” as the Debtor  saw it.

Judge Wedoff ruled that the Debtor’s omissions were not material enough in value, and did not rise to the level of “fraud” necessary, to deny Discharge. The District Court disagreed. The matter was eventually taken up on appeal to the 7th Circuit.

The Opinion

The Bankruptcy Judge had the benefit of hearing the Debtor’s testimony and deemed her credible: he knew her approach was wrong but thought she was sincere in her beliefs.  By contrast, the Appellate Court focused on the telltale signs that the Debtor had not been sincere: her Attorney did not represent her on appeal, the Attorney did not testify on her behalf at trial, one of the omitted creditors was the Plaintiff here, despite the Debtor’s claim that she had only excluded “friends and family.” In other words the 7th Circuit reasoned that it could not trust her: there were just too many loose ends and inconsistencies.

The Upshot

Taken literally, this Opinion could be taken to mean that no lie in a sworn Federal document is de minimus. They’re all deal killers, because all it takes to undermine the Bankruptcy system is for a Debtor to lie and others to stand silently by.

But does that mean that mistakes or unintentional omissions in a Bankruptcy Petition can result in a denial of Discharge or worse? I would say that is going too far. This Opinion does not depart from the spirit of the Bankruptcy Code by that much. All it really does is to reinforce the fact that intentional misrepresentations will not be overlooked, no matter how minor they appear to be in the big picture.

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

bankruptcy-court-seal

Settlers’ Housing Service, Inc. v. Bank of Schaumburg
Adversary No. 13 A 01328 Issued: November 18, 2014
Judge: Jack B. Schmetterer

Settler’s, a not-for-profit supplier of immigrant housing, bought property in DuPage County, Illinois with a loan from the Bank of Commerce. When Settler’s eventually sought Chapter 11 protection, it blamed the Bank for its troubles and alleged that it had inserted documents into the stack signed at Closing by its President (who was apparently in between flights), including a line of credit and cross-collateralization of the newly-acquired properties with existing ones. When Settler’s eventually had to borrow from the Bank to make its mortgage payments, the house of cards collapsed, the Bank began foreclosing, and Bankruptcy was the only plausible way to reorganize.

The Adversary Complaint

Settler’s had asserted its version of events in an Adversary Complaint, First Amended Adversary, and Second Amended  Adversary. All prior versions of its Adversary Complaint had been dismissed in whole or part. Now, the Bank sought to dismiss its 3rd Amended Complaint, which consisted of 14 Counts – not all of them entirely new:

1. Equitable Subordination
2. Aiding and Abetting Breach of Fiduciary Duty
3. Fraudulent Misrepresentation
4. Fraudulent Concealment
5. Breach of Illinois Consumer Credit Act
6. Fraud, Illegality and Unenforceability
7. Constructive Fraud
8. Setoff
9. Unjust Enrichment
10. Conspiracy to Defraud and Civil Conspiracy
11. Tortious Interference With Contract
12. Breach of Fiduciary Duty
13. Conversion and Accounting
14. Improper Post–Petition Interest and Receiver’s Fees

Opinion

The Court’s discussion is thorough, beginning with a jurisdiction section (usually a rubber-stamp) that refers to the Supreme Court’s Stern v. Marshall ruling, the 7th Circuit’s narrow interpretation of Stern in Executive Benefits Insurance Agency v. Arkinson, Section 157(b)(2)(C) of 28 US Code, and a consideration of what constitutes a “final and appealable” order.

The balance of the Opinion is equally detailed, featuring count-by-count evaluations under both Federal and Illinois law. The issues taken up in the opinion range from fraudulent misrepresentation, fraudulent concealment, consumer fraud and constructive fraud, to conspiracy, breach of fiduciary duty, and even the statute of limitations applicable to counterclaims.

The Court also notes in the Opinion that the parties’ Attorneys were rehashing issues ruled on already: either by attacking counts that previously withstood a motion to dismiss, or reasserting arguments that previously failed. In either case, warned the Court, the result was a sanctionable waste of time.

Ruling

Ultimately the Bank’s motions wre granted in part and the following counts dismissed with prejudice (the Court noting that to amend would be “futile”):

Count 2 Aiding and Abetting
Count 4 Fraudulent Concealment
Count 7 Constructive Fraud
Count 12 Breach of Fiduciary Duty
Count 13 Conversion and Accounting
Count 14 Improper Charges

No certification of “no just reason for delay of a final ruling” per FRCP 54(b) and FRBP 7054 was given, as the Court observed that Federal practice favors waiting until all issues have been ruled on before any single ruling is taken up on interlocutory appeal. See In re Manhattan Investment Fund, 288 B.R. 52, 56 (S.D.N.Y. 2002) (discouraging interlocutory appeal). And while the Court doesn’t issue sanctions here, it obviously wants to avoid any further waste of time and resources – even if have the same argument over and over does make Attorneys seem determined to their clients. The Court just wasn’t having it.

The Upshot

This Opinion showcases the interplay of Federal and State law in a complex commercial scenario. It also displays the characteristic desire of Federal Courts to keep things clear and simple: which is unfortunately the opposite of how convoluted factual and legal situations play out in State trial courts.  Finally, the Opinion reminds lawyers to refrain from being overzealous. The tactic may make clients happy in the short run, but if the end result is to tick off the Court, nobody wins.

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

bankruptcy-court-sealShmeglar v. PHM Financial et al., 14-121 (Interpleader Plaintiffs)
Bankruptcy Court, Northern District of Illinois, Eastern Division
Issued November 18, 2014 by Judge Jack B. Schmetterer

In this Memorandum Opinion the Bankruptcy Court pries apart a Fed. R.  Civ. Pro. 12(c) Motion for Judgment on the Pleadings brought by banks and servicers who claim to be entitled to mortgage payments from the Debtor. In the process, the Court peers down the rabbit hole of securitized mortgages – the process of bundling loans into trusts, slicing trusts into securities, and trading the securities on Wall Street. And what the opinion reveals isn’t pretty.

Ultimately, this case is like thousands across Illinois, and tens of thousands across the country, in the past 10 years that arise from the clash between the big-money business of securitization and the reality of the subprime mortgage debacle. At the root of it all there was always this simple, but previously unthinkable, question:  Who owns my mortgage note and who should I be paying?

Whose Mortgage Is It Anyway?

So who should a homeowner be paying when their mortgage has been securitized, sold, transferred, allonged, and robo-signed? The gaggle of interpleading banks and mortgage services in this case thought it was obvious based on the documents on file with the Court that they were the right ones to pay. But was it really obvious based on documents alone? According to the Court, no it was not.

Every Trick In The Book

Indeed, these facts read like the Forrest Gump of the mortgage mess – virtually everything that had plagued homeowners across the country had happened here, too. No wonder the opinion covers nearly every hot-button tactic used by desperate homeowners over the years to keep from paying their mortgages: the impenetrable mortgage trust, the confusing and misleading array of servicers and transferees, the notes, allonges, and  robo-signed transfers in blank: it’s all here!

But wait, there’s more! This case even involves a Cook County foreclosure case in which judgment that was entered but no sale took place – so no “final confirmation” was issued. The result was an incomplete judgment and a lurking Stern v. Marshall problem. Oh no! And last but not least, even the Illinois enactment of the UCC was called on by the Opinion.

The Upshot

Following its thorough analysis, what does the Court conclude? Can the Debtor/Mortgagor rest easy knowing to whom he must make out his mortgage payment? Nope. Instead, the Opinion confirms that the mortgagee banks and servicers here, like others around the country, have tied themselves into a knot that can only be untangled following an evidentiary hearing (and maybe not even then).

So while there is no final answer to the Debtor’s question of who to pay, at least the Court seems to make the banks put their money where their mouth is. That’s got to count for something, right?

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

When Lien Strips Attack

As a Bankruptcy lawyer I can’t count how many times people have asked why Courts won’t reduce their mortgage debt to match the deflated value of their home, or why they should pay anything on that second mortgage, line of credit, or HELOC, when they’re underwater. I even discussed these questions and the state of the law concerning lien strips in this post. Now, the very cases referred to in that post have made it to the U.S. Supreme Court and the stage is set for the battle of the lien strip cases.

Of course this all started with the Supreme Court’s 1992 Opinion in Dewsnup v. Timm that the Bankruptcy Code does not permit the cramdown of a partially secured mortgage. Some Courts took this to mean that lien-strips are a no-no. Others interpreted it to mean that lien-strips were permissible under the right circumstances. So in some parts of the country a completely unsecured second mortgage can be stripped, but only in a Chapter 13 reorganization; while in other parts it can be stripped in a Chapter 7 liquidation, too.

So, with Courts in disagreement, what’s a home-owner to do? Remember, in Dewsnup the Court ruled the Bankruptcy Code doesn’t permit mortgages to be written down to the value of the home – even though that practice, known as the cram down,  is acceptable as to vehicles. Ironically, one of the Court’s primary concerns in Dewsnup was to prevent windfall gains to home-owners who strip away their loans, then enjoy the profits as their homes rise in value.

But that didn’t exactly happen, did it? These days, most people’s homes are more a burden than a boon. Luckily the Supreme Court has agreed to take another look at the question. And just in time: being underwater with your 1st mortgage while having an unsecured 2nd is the new normal. And nowhere is that more true than in Florida where both cases to be consolidated and heard by the Court, Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, started off as Chapter 7 Bankruptcies.

In a nutshell, the issue to be decided is whether, in a Chapter 7, partially secured mortgages can be written down and unsecured ones written off, despite the Supreme Court’s Dewsnup decision. Here, Florida home-owners filed Chapter 7 and were allowed to strip their unsecured second mortgages. That decision by the Bankruptcy Court was affirmed by the Federal District Court as well as the 11th Circuit Court of Appeals. Bank of American now wants the Supreme Court to outlaw Chapter 7 lien strips once and for all.

Stay tuned to this station as the case goes up for argument and decision. We’ll bring you the opinion as soon as it’s available.

Your Turn

Want to share your thoughts on the largest municipal Bankruptcy in U.S. history? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Detroit SkylineThe Announcement

Recently Steven Rhodes, the Judge tasked with managing the largest municipal Bankruptcy in American history, cleared Detroit to emerge from reorganization and put to bed a series of hard-fought battles between creditors, citizens, employees, and pension recipients. Before approving the move though, Judge Rhodes issued a heart-felt plea to all involved: “move past your anger” and “fix the Motor City. What happened in Detroit must never happen again.” He also observed that “Detroit’s inability to provide adequate municipal services… is inhumane and intolerable, and must be fixed.”

Politicians and civic leaders, including Michigan’s Republican Governor Rick Snyder, hailed Friday’s decision as a milestone and a “fresh start” for the Motor City. Indeed, it was Snyder who originally agreed with State-appointed Emergency Manager Kevyn Orr to take the City into Chapter 9: a last-resort he had promoted during his re-election campaign.

Lightning Fast Recovery

By Bankruptcy standards Detroit’s case finished in a flash thanks to a series of deals between the City and major creditors, especially retirees who agreed to smaller pension checks (after the Judge reminded them that they had no protection under the Michigan Constitution) and bond insurers who relented on their push to sell the City’s art collection despite being owed more than $1 Billion. By contrast it took more than 2 years for Stockton, California to get out of Bankruptcy, while tiny San Bernardino is still operating under Chapter 9 more than 2 years after filing.

An Innovative Plan

Detroit’s Plan of Reorganization involves cutting pensions of non-public-safety retirees by 4.5%, completely discharging $7 Billion of debt, and spending over $1.7 Billion to demolish blighted buildings and improve basic services. In particular, Judge Rhodes praised the way contentious issues in the Plan were resolved: such as the deal to avoid selling artwork from the Detroit Institute of Arts, and to keep pension cuts from getting worse. In fact, while he said the pension deal bordered on “the miraculous,” he acknowledged that the necessary cuts would cause hardship for the many who would now have to get by on less than $20,000 a year.

Ultimately Judge Rhodes had to accept or reject Detroit’s Plan in full rather than cherry-picking sections. He relied on the advice of an expert, who deemed the Plan “feasible” and predicted that its success would depend on the fiscal skills of the Mayor and City Council, as well as a City Hall technology overhall. Maybe the most unusual feature of the Plan was its reliance on $816 Million put up by the State, foundations, philanthropists, and the Institute of Arts, in order to forestall even deeper pension cuts and avert the sale of art – a step the Judge warned “would forfeit Detroit’s future.”

What Went Wrong In The First Place

In retrospect, perhaps this was inevitable. After all, Detroit’s economy was clearly at the center of a “Perfect Financial Storm” consisting of municipal corruption, fiscal mismanagement, the long, slow decline in the auto industry, and widespread urban flight that strangled the population from 1.2 Million to 688,000 by 1980, turning whole neighborhoods into boarded-up wastelands. Adding insult to injury, despite encompassing more square mileage than Manhattan, Boston, and San Francisco combined, Detroit couldn’t even count on sufficent tax revenue to cover pensions, retiree benefits like health insurance, and debt service on funds borrowed to meet its budget burden. Still, the nail in Detroit’s coffin was the horrible debt deal made by former Mayor Kwame Kilpatrick, which locked it into paying high rates on its debt even as interest rates fell during the recession

Light At The End of The Tunnel

Detroit Regional Chamber President and CEO Sandy K. Baruah declared Detroit to be “on the cusp of a new era and primed to reinvent itself in a way many people did not think possible.” True. But what really matters is that the Motor City has a new direction and a long, hard, clean-up job ahead. Sure, Bankruptcy was the catalyst for change, but only the City and its residents – businesses, individuals, religious institutions, and government – can affect real change. Here’s hoping, Detroit. We’re all pulling for you.

Your Turn

Want to share your thoughts on the largest municipal Bankruptcy in U.S. history? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Gift CardIn the recent case of Beeman et. al. v. Borders Liquidating Trust et al. from the Circuit Court for the Southern District of New York decided on October 29, that Court examined what ought to happen when relief that could be granted, for practical reasons is not.

This controversial policy, referred to as “Equitable Mootness” means certain judgments will not be issued – even though they could – because doing so upsets the established order in a Bankruptcy case. It is obviously a touchy subject, but squarely within a court’s discretion.

Here, more than $17 Million had been distributed to creditors of Borders Bookstores in its Chapter 11 reorganization when 3 of its customers whose store gift cards became useless when it went bankrupt sought to be placed in a special “class” of claimants. The Plaintiffs started in the Bankruptcy Court but did not get traction there, so they proceeded in District Court.

In the Bankruptcy case below, the Court determined due to a variety of factors, including timing of the claims and the stage reached in the case, that Equitable Mootness should kick in.  The District Court agreed and clarified that the doctrine applied not only to ongoing reorganizations but to the ones, like this, that ended in liquidation – a s0-called “Liquidating 11.”

In its Opinion the District Court did point out the exceptions to the Equitable Mootness doctrine articulated in the 1993 case of Frito‐Lay v. LTV Steel(In re Chateaugay Corp.). But the Court also made it clear that this situation did not satisfy those conditions.

In the end, the decision in this case was complex, as were the legal principals, but the basic idea could be reduced to this: if you are a creditor in a Bankruptcy , act fast, be timely, and don’t let up. If you can’t do that, stay home and save yourself the Attorneys’ fees.

If you are a Creditor in a Bankruptcy case, call us in confidence at 630-378-2200 or via e-mail at mhedayat[at]mha-law.com.

Money Fight

So you’re doing business as usual and notice that payments from your customer are getting later and later. Turns out that customer is struggling to navigate in the sputtering economy. Waiting for your money is bad enough; but what if you receive a demand to refund what you’ve been paid? And not because of anything you’ve done but because your customer has filed for Bankruptcy?

Sound like a nightmare? Actually, it happens everyday. So what do you do if you’re next? That was the question addressed in the recent New York case of Davis vs. Clark-Lift, in which a reorganizing Chapter 11 Debtor paid vendors later and later as it listed towards Bankruptcy. But even those lucky creditors who got paid could not escape the demand of the Trustee (Davis) to fork over what they had received.

As the Court in Davis explained, to set aside a payment as a “Preferential Transfer” under Section 547(b) of the Bankruptcy Code the moving Creditor or Trustee must established that the Debtor made it:

(1) To an  existing creditor to satisfy an existing debt;
(2) While it was actually, or presumptively, insolvent;
(3) Within 90 days before filing its Bankruptcy case; and
(4) The payee therefore gets more than it otherwise would.

So if you got paid within 90 days before your customer filed Bankruptcy, it’s all over right?

Not exactly. Even if a payment qualifies as a Preferential Transfer the recipient can assert defenses. If successful, the payee retains the money. One of the most frequently-used strategies is the “Ordinary Course of Business” defense found in Section 547(c)(2) of the Code, which provides that a payment made in the ordinary course of business will not be avoided as a preference. The idea behind the defense is to permit a reorganizing Debtor to maintain a semi-normal relationship with some creditors: because rebuilding goodwill is key to a successful reorganization.

In the Davis case the Court’s analysis was primarily focused on what the “ordinary course of business” was; which in turn meant determining the most common and frequently-used payment terms for vendors during the relevant 90-day period. This means looking at all vendors at first; then vendors of a certain type; then payments of a certain type; and finally a comparison between terms bef0re the 90-day period began running and afterwards.

The decision in the Davis case, like many similar cases, was that the vendor had to disgorge what it was paid. What would it get in return? Perhaps a return of its goods so it could resell them and offset its losses? Nope. In return for disgorging the payment the vendor got a claim in the Debtor’s case. Most likely, it wouldn’t see the money. So now the vendor was out both its money and its property. Isn’t the law grand?

If you have seen situations like this or are yourself the subject of such a situation, call us in confidence at 630-378-2200 or reach us at mhedayat[at]mha-law.com.