Articles Posted in Bankruptcy

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Baker Botts L.L.P. v. ASARCO LLC, 14-109 (Jun 15) U.S. Sup.Ct.

Background

ASARCO hired the plaintiff law firms to assist it in carrying out its duties as a Chapter 11 Debtor in Possession (DiP) per 11 U.S.C. 327(a). When ASARCO emerged from Bankruptcy the law firms filed Fee Applications pursuant to 11 U.S.C. 330(a)(1), which permits the Bankruptcy Court to “award …reasonable compensation for actual, necessary services” by professionals.

Lower Court Rulings

ASARCO objected to the Fee Applications brought by its Attorneys. The Bankruptcy Court rejected ASARCO’s objections and went on to award fees for time spent defending the Fee Applications. On appeal from the Bankruptcy Court Order, The District Court held that the Law Firms could be awarded fees for defending their Fee Applications. On appeal from the District Court’s Order, the Fifth Circuit Court of Appeals reversed. Continue reading →

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Carhart v. Carhart-Halaska Int’l, LLC 14-2968 (Jun 08)(7th Cir.)

Background

Federal Case

Carhart and Halaska own CHI. CHI terminated sales agent MRO. MRO filed a Federal suit for breach of contract. Carhart bought MRO’s Federal claim for $150,000 and became nominal Plaintiff. That lawsuit was actually against a company of which he was 1/2 owner.

State Case

Halaska sued Carhart in Wisconsin State Court, alleging that Carhart had breached his fiduciary duty by becoming the Plaintiff in the MRO Federal case, by writing checks against CHI accounts without approval, by depositing payments owed to CHI into Carhart’s account, and by withholding accounting and financial information.  The Wisconsin State Court appointed a Receiver, who informed the Federal court that CHI had no assets with which to pay a lawyer and consented to the entry of a $242,000 default judgment (the sum sought by Carhart), giving Carhart a profit of $92,000 on the purchase. Continue reading →

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BoA v. Caulkett, 13–1421 (Jun 1) Supreme Court of the United States

Background

This case came to the Supreme Court due to a Circuit split on the issue of “Lien Stripping.” In this pair of cases the Debtors both filed Chapter 7 Bankruptcy cases, owned houses encumbered with senior mortgages and “underwater” junior mortgages held by the Petitioner banks. Because the amount owed on each senior mortgage was greater than each house’s current market value, the Banks would have received nothing if they foreclosed on the junior liens (i.e. underwater).

Debtors sought to void their junior mortgage liens under the terms of Bankruptcy Code §506, which provides that “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 USC §506(d). In each case, the Bankruptcy Court granted the Debtor’s respective motions, and both the District Court and the Eleventh Circuit Court of Appeals affirmed.

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United States Supreme Court, Docket: 14-116 Opinion Date: May 4, 2015

Appellant Bullard filed a Chapter 13 Bankruptcy case and proposed Plan. The Debtor’s mortgage lender objected to the treatment of its claim under the Plan and the Bankruptcy Court sustained that objection, denying confirmation of the Plan with leave to amend.

First Appeal

The Debtor appealed the denial of confirmation to the 1st Circuit Bankruptcy Appellate Panel, which concluded that denial of confirmation was not a final, appealable order under 28 U.S.C.158(a)(1). Nonetheless, the BAP heard the issue as an interlocutory appeal – the operative provision in the Bankruptcy Code requiring “with leave of the court.” Tha BAP agreed that Bullard’s proposed Plan did not accord proper treatment to the mortgage company and upheld the ruling of the Bankruptcy Court.

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Think you know about Lien Strips, the controversial practice featured in our post here? Well think again, because the law may be changing. Lucky for you we have an update ready to go.

WHAT IS A LIEN STRIP?

11 USC 1322(b) provides that wholly undersecured liens on real property may be removed or “stripped,” and the debt to which they relate treated as unsecured in a Chapter 13 Plan of Reorganization. Lien stripping has 2 distinct, and very desirable, benefits for debtors:

  1. The lien strip removes the junior lien from the property entirely; and
  1. The debtor only pays a percentage of the claim (as if it were an unsecured debt).

CAN A PARTIAL LIEN STRIP SUCCEED?

There is no such thing as a partial lien strip. Bankruptcy Courts will only allow a lien to be stripped if it is wholly undersecured (i.e. unsecured): that is, the secured potion is zero or negative. Moreover, lien stripping is permissible only for claims secured by the Debtor’s principle residence because a lien strip modifies the “total package of rights for which the claim holder bargained.”

QUALIFYING FOR A LIEN STRIP

For a lien to be stripped, the value of the debtor’s property as of filing, minus fully-secured non-target debts, must be = or < $0. Once upon a time meeting these requirements could be challenging; but today, when many homeowners are “underwater” as to their first mortgage and have a HELOC or 2nd mortgage on top of that, the conditions necessary for a lien strip to take place are relatively straightforward and can sometimes be met without much resistance from the affected creditor.

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On February 9, 2015 the Bankruptcy Court for the Northern District of Illinois, Eastern Division ruled in the case of Brandt vs. Rohr-Alpha, a case involving fraudulent transfers and whether certain debts can be avoided in Bankruptcy.

What is a “Fraudulent Transfer?”

A pre-petition payment is avoidable as constructively fraudulent according to 548(a)(1)(B) when the Debtor:

  1. Transfers property or an interest in property;
  2. Within the 2 years preceding its bankruptcy;
  3. Got less than reasonably equivalent value; and
  4. Was insolvent or rendered insolvent as a result.

Reasonably Equivalent Value

To determine whether reasonably equivalent value was exchanged the Court must determine:

  1. Whether at time of transfer the Debtor received value; and, if so,
  2. Whether that value was equivalent to what the debtor gave up.

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For Debtors, Chapter 7 Liquidation is the ultimate relief, while Chapter 13 and 11 Reorganization offers an opportunity to reduce their Debtor’s payments in light of their income. In either type of case however, the Creditor is not entitled to anything until it has filed is Proof of Claim.

What Is a Proof of Claim?

The Proof of Claim or “PoC” is the means by which Creditors state:

  • How much they are owed by this Debtor;
  • Why they are owed that much to begin with; and
  • Whether debt is secured by property of the Estate.

Different types of cases contain strict deadlines for filing a PoC, and each PoC should be accompanied by supporting documentation such as a calculation of sums due, a copy of a Judgment Order, etc.

Will The Claim Be Paid?

Once filed, the Creditor’s PoC represents what could be paid to it, presuming:

  • The Debtor has sufficient assets to liquidate in order to pay the Creditor’s Claim; or
  • The Debtor’s Reorganization provides for full payment of creditors – a “100% Plan.

But in the overwhelming number of cases the reality is:

  • The Debtor has few if any assets to liquidate, resulting in a “No Asset” finding; or
  • The Debtor’s Plan of Reorganization involves paying only a small fraction of debts.

What If The PoC Is Wrong?

If a Debtor believes that a Creditor filed a materially false or inflated Claim, that Debtor may file an Objection to Proof of Claim. The Objection will require the Creditor to support, clarify, or defend its Claim. Creditors that fail to do so may lose their Claim altogether. As in the case of the PoC, there is a strict time limit in which to file Objections. Failure to do so is fatal to the Objection and permits the Creditor to pursue whatever amount it seeks.

The Upshot

For Creditors whose Debtors file Bankruptcy, the key to collecting is diligence and proactive planning. For Debtors whose Creditors continue to pursue them even past a Bankruptcy filing, it is critical to know what a Creditor can legitimately seek, what it cannot, once a Bankruptcy has been filed.

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.

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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.

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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.

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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.

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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.