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Many small business owners find comfort and success capitalizing on a franchise. Franchisors use Non-Compete (“NCA”) and Non-Disclosure (“NDA”) clauses as well as mandatory arbitration provisions to protect themselves. But should such a provision be effective against a non-signing spouse? That was the question before the Appellate Court in the recent 7th Circuit case of Everett vs. Paul Davis Restoration. The short answer? Yes, it is.

The Family Business

Davis Restoration entered into a Franchise Agreement with Matthew Everett, husband of Plaintiff Renee, as the “principal owner” of Franchisee EA Green Bay. Sometime after signing as the sole owner of EA, Matthew transferred 50% of the company to his wife despite not securing permission from the Franchisor beforehand. Eventually, the Franchise Agreement was terminated and the 2-year non-compete provision took effect. Matthew then transferred the remaining 45% of EA to his wife, who continued to operate it under the name “Building Werks” from the same location with the same customers and employees. Moreover, the Franchisor contended, Building Werks continued to capitalize on its good will and reputation.

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In 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.

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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:

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In June 2013 the US Supreme Court published an opinion arising from a dispute over the estate of Pierce Marshall – better known as the husband of Anna Nichole Smith. That case, Stern vs. Marshall, gave rise to a surprising decision; namely, that Bankruptcy Courts could not rule on the State-law aspects of a dispute even if they were before the Bankruptcy Court as part of the larger dispute. The operative distinction would henceforth come down to whether or not a dispute qualified as a “core proceeding” (i.e. whether it was the kind of question over which the Bankruptcy Court had jurisdiction).

Since the Stern decision was released in 2011, results across the country have often been inconsistent as Bankruptcy Lawyers and Judges attempt to apply this new set of distinctions and decide whether cases should be heard or referred back to the State Courts. In many cases, Bankruptcy Courts defaulted back to State Courts without much discussion.

In an update and clarification to its Stern vs. Marshall Opinion, the Supreme Court recently decided Executive Benefits vs. Ch. 7 Trustee for Bellingham Ins. Agency(Jun. 09). The opinion answered a number of questions that had arisen in the wake of Stern. In particular, the Supreme Court clarified how Bankruptcy Courts should proceed when faced with “core” claims that were now designated as “non-core” under the Stern standard. These claims fall into the so-called “statutory gap” in the Bankruptcy Code.

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Everything Was Going Fine Until…

Your customer or borrower has been paying like clockwork and you, the creditor or vendor, have been dispensing goods and services as promised. Then your customer starts to pay a little later, then later still. Why not? Times are tough. So you do the decent thing and take their payments without complaining. Next thing you know, your customer seeks bankruptcy protection, leaving you holding the bag for thousands, tens of thousands, even hundreds of thousands of dollars worth of goods and services. Money you’ll never see again. 

The Worst Part Is (Not) Over

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Okay nobody dies, but the case does address the long-overdue question:

What happens when the property taxes of a Chapter 13 Debtor, protected by the Automatic Stay, are sold at auction? 

Here the Bankruptcy Court for the Northern District of Illinois, Eastern Division, had to decide whether a Chapter 13 Plan of Reorganization affects the deadline for the Debtor to redeem sold taxes. 

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Written by Jonathan Trent and Mazyar Hedayat  Edited by Mazyar M. Hedayat, Esq.

Small business remains the backbone of the most vibrant economy in the world. America leads in innovation and hard work thanks in large part to small businesses and entrepreneurs. But despite the best intentions of their owners small businesses have a high failure rate; especially in the first few years of operation. 

But why the high failure rate? One of the most common reasons is that the business owner, entrepreneur, or manager of the business 

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By Andrew Jackson  Edited by Mazyar M. Hedayat, Esq.

In this post we will skim the surface of how the Automatic Stay, put into effect via Section 362 if Title 11 of the United States Code, helps clear the air for people and companies that file Bankruptcy; allowing them to repay their creditors the best they can. What Is the Automatic Stay? Bankruptcy is the Federal process by which an individual, a couples, or a business entity is permitted to shed liabilities and obtain a fresh start. This process can take the form of a one time liquidation or a reorganization that unfolds over time. But all forms of Bankruptcy have one thing in common: the Automatic Stay found at 11 USC 362.  So what is the Stay? It is

a self-executing, universal injunction that goes into effect the moment a case is filed and keeps most creditors from exercising control over the assets of the Bankruptcy Estate.

Why An Automatic Stay?

To ensure that similarly-situated creditors get treated equitably in a Bankruptcy, Congress wrote the Bankruptcy Code to ensure that nobody could get the advantage. The Automatic Stay ensures that there is enough to go around, and that no single Creditor gets too much; even if what is left to distribute is only pennies on the Dollar. Under the Code, fairness equals equitable distribution.To ensure fairness, Section 362 makes it a punishable offense for most creditors to take actions such as:

  • Filing or pursuing a lawsuit to collect
  • Garnishing wages or issuing a citation
  • Filing or foreclosing a mortgage or lien
  • Demanding payment orally or in writing

What if the Stay is Violated?

Because the intent of Congress in creating the Automatic Stay was to usher in a quiet period during which the Bankruptcy Trustee could take stock of assets and liabilities without having to fight the Debtor’s battles, penalties for violation of the Stay are harsh. Any breach of the peace, with or without the creditors’ knowledge, is considered contempt of Court punishable by injunctive, monetary, and in proper circumstances punitive, damages. This is worth repeating:creditors can be punished even if they did not know  that they were violating the Automatic Stay. As long as the Stay is in effect – that is, a Bankruptcy case was filed – violation by a creditor is a civil offense. Note however; Congress considered some things too important even for the Automatic Stay. Thus, Criminal matters are not affected; nor are family law (i.e. Divorce) matters.

How is the Automatic Stay Put Into Effect?

Neither a Debtor, the Debtor’s Lawyer, nor the Court needs to take any action to activate the Stay – it comes into existence by operation of law when the case is filed. How do creditors know? Every creditor listed in the Bankruptcy Petition is served notice by the Court Clerk.

What if My Creditors Say They Didn’t Know?

All creditors identified in the Petition receive notice of the case from the Court Clerk, and all recipients are bound by the provisions of §362 whether or not they know they are violating it. You read that right: even if a creditor was unaware of the Stay when they violated it, they can nonetheless be punished by the Bankruptcy Court. In fact, the Automatic Stay is so powerful that it restrains not only creditors but the majority of Judges and Attorneys from exercising dominion or control over assets of the Bankruptcy Estate.

How Long Does The Automatic Stay Last?

In practice, the Automatic Stay lasts for a relatively short time in the case of liquidation and much longer in the event of reorganization. In Chapter 7 the Automatic Stay protects all non-exempt property that can be administered by the Trustee for about 90 days (the length of most Chapter 7 cases). That is, until a discharge is issued, the Stay protects all items in the Bankruptcy Estate. In Chapter 11 and 13 the Stay remains in effect for as long as the Plan of Reorganization is active. In Chapter 13 that means a maximum of 5 years. In Chapter 11 that means a long as it takes to repay creditors according to the Plan approved by the Court and a majority of unsecured creditors. Wrapping It All Up After reading this article it should be evident that the Automatic Stay is a powerful tool. While we have discussed only a fraction of its ramifications here, you should now have a better understanding of this portion of the Bankruptcy Code. Take advantage of your new appreciation for the law by contacting M.Hedayat & Associates to set up a telephone or office consultation.

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Guest Post By Jonathan Trent

Edited by M. Hedayat, Esq.


It’s that time of year again! As January winds down business owners are contemplating new projects, new ideas, and New Year’s resolutions. Putting together resolutions can be an eye opening experience… or a chore. Sure, you want to continue improving what works, weed out what doesn’t, and learn from the past to avoid making the same mistakes in the future. But when the rubber meets the road, how do you make that call?

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Midwest Generation was established in 1999 as a holding company for coal-fired power plants in Illinois. By this summer the company had purchased 6 such plants from from ComEd including: 

  • Will County power station, Romeoville
  • Fisk and Crawford stations in Chicago
  • Waukegan power station, Waukegan
  • The Joliet power station in Joliet, and 
  • The Poweron power station in Pekin

This company started out with high hopes and innovative ideas for the development of what has come to be known derisively as clean coal: high grade, low-emission power creation that would be coupled with better returns for the battered coal industry. But like every business emerging in the shadow of big-coal, Midwest Generation lost momentum as pro-coal legislation stalled. Now it looks like the economy has dealt it a death blow.

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