Recent Entries

Do Casinos Really Deserve Bankruptcy Protection?

Profile ImageBy: Anne M. Smith, Attorney

Recently, Caesars Entertainment Corporation filed for bankruptcy protection. It is seeking to freeze lawsuits and actions of creditors, and permit reorganization of debts and assets so the business can continue with day to day operations.

Is a casino entitled to protection from its creditors? While this may ultimately be more of a moral question, since this business entity is entitled to the remedies provided by our laws, the question of whether it’s the best remedy for all parties, not just Caesars. And frankly, is it fair?

In the face of involuntary bankruptcy as pushed by three creditors in Delaware, Caesars has filed its own chapter 11 in Illinois, where it may be easier for the casino owners to be protected from liability. There have been allegations of inside deals and possible fraud regarding transfer of assets, and I have no doubt that the Court will scrutinize every aspect of every transfer in recent years relating to this $20 billion bankruptcy. The basis for the chapter 11 is Caesars’ claim that it carries more debt than any other U.S. casino-hotel company, and that its owners have been reluctant to spend money on up-growth in gambling markets. Poor management decisions and staggering debt have led this faction of Apollo Global Management LLC and TPG Capital LP to seek protection. So the question is whether these parent companies foisted more debt on this single entity to bolster their own bottom lines, and should they be able to seek protection with such a cloud of suspicion.

When a casino is involved, it is difficult to be unbiased about its right to ask for bankruptcy protection. Why would a casino ever need help to restructure debt, when its very existence acts as a vice to so many consumers? The reasoning behind this filing may certainly be problems and debts of the casino owners’ own making, but can’t that be said of many debtors? Remember that our laws allow this protection and aid when it is deserved, as determined by our judges. The court bears the burden of making sure the laws are followed, without determination of morality or judgment by the public.

A quick search of Pacer for Caesars reveals 87 filings since January 12, 2015. Caesars’ initial voluntary petition lists assets totaling over $12 billion, and debts exceeding $19 billion. The list of creditors is staggering, as are the amounts owed to each. If the house always wins, why do so many casinos end up in bankruptcy?

Below is the link to Wikipedia’s entry for Caesars Entertainment Corporation, for more specific information about their operating expenses and company history.


Creditors with Education Receivables should Review Chapter 13 Cases Carefully

Profile ImageBy Matthew G. Burg, Attorney

Since United Student Aid Funds, Inc. v. Espinosa [1] was decided by the United States Supreme Court in 2010, many education loan creditors have begun reviewing Chapter 13 plans to see if there is any provision specifically attempting to discharge any of the otherwise non-dischargeable education loan. How specific does that provision need to be?

In In Re Haney [2] , a debtor filed a Chapter 13 bankruptcy listing a student loan creditor as her only creditor in her petition. Her plan proposed that creditors holding allowed unsecured claims “to the greatest extent possible from payments made by the debtor over a period sixty months.” Her plan was confirmed without objection. The educational loan claim was timely filed, and was allowed. The education loan was not paid off in the debtor’s Chapter 13 bankruptcy. When the creditor attempted to collect the remaining debt owed, the court held that the remainder had not been discharged in the debtor’s bankruptcy. In so holding, the court noted that the debtor’s plan did “not contain an express provision purporting to discharge the debtor’s student loan debt.” The bankruptcy court noted that the plan in the Espinosa case “contained an express provision proposing to pay the principal of the student loan debt and discharge the accrued interest.”

However, that is just one bankruptcy court’s ruling. Other bankruptcy judges may not read the Espinosa case as requiring such a specific plan provision, specific to a creditor’s student loan, to consider the debt discharged. Espinosa can be read differently – that a general provision, specifically discharging any unsecured debt that is not paid through the plan, operates to discharge student loan debt even without an adversary proceeding being filed.

In this situation, if an education loan creditor attempts to collect on that debt, the creditor may have violated the discharge injunction, subjecting itself to sanctions. A third-party debt collector may violate the Fair Debt Collections Practices Act when it attempts to collect on such a debt. Class action demands may be made if there is no procedure in place to safeguard against this. If there is a question in either the debtor’s plan, or the confirmation order, or the discharge order, as to wording that may be interpreted to discharge your education loan receivable, it may be wise to have your bankruptcy attorney or general counsel involved at that time. Filing an adversary proceeding in the bankruptcy court requesting declaratory judgment, is a way to bring some certainty to the question of whether your education loan receivable was discharged in the bankruptcy. Your bankruptcy attorney may also be able to negotiate repayment terms through the debtor’s bankruptcy attorney, to avoid litigating further.

[1] United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010)
[2] In Re Haney 97-70937, ADV. CASE NO. 11-7024, 2011 Bankr. LEXIS 4746


Supreme Court to Decide on Lien Stripping in Chapter 7

Profile Imageby Monette Cope, Junior Partner

The Eleventh Circuit is the only Circuit which permits Chapter 7 debtors to strip wholly unsecured mortgage liens.[1]   All other circuits follow the Supreme Court’s decision in Dewsnup v. Timm and do not allow it.[2]   The Supreme Court of the United States recently agreed to hear an appeal of two of the Eleventh Circuit’s recent cases permitting lien stripping in Chapter 7 to resolve the circuit split of opinions.[3]

In Dewsnup, A Chapter 7 debtor sought to void the unsecured portion of a mortgage lien on her residence.  She argued that the unsecured portion of the claim was void under § 506(d)[4]  which states “to the extent that a lien secures a claim…that is not an allowed secured claim, such lien is void”. (Italics added).  The crux of her argument was that the unsecured portion was void because it was not an allowed secured claim.  Under §506(a)[5]  a claim is an allowed secured claim to the extent of the value of the collateral.

The Supreme Court found that Congress, when drafting the Code, did not intend to abandon the ancient bankruptcy maxim that liens pass through bankruptcy unaffected.  The definition of an allowed secured claim in §506(d) is not the same as what defines a secured claim in §506(a).

An “allowed secured claim” in §506(a) is defined by §502.[6]   Claims are “allowed” unless objected to, and §502(b) lists the grounds on which bankruptcy courts may disallow proofs of claims. Claims may not be disallowed simply because the lien is partially unsecured.

Therefore, an allowed secured claim under §506(d) is one that has a valid state law lien and has not been disallowed under §502.  Liens are only void under §506(d) if the claim was disallowed under §502.

The Eleventh Circuit bases its allowance of voiding wholly unsecured liens under §506(d) on a case it decided before Dewsnup[7]  and its own “prior panel precedent rule”.  That rule requires the court to follow its own precedent unless a Supreme Court decision that is “clearly on point” overrules it.  Because Dewsnup was decided in the context of using §506(d) to strip down a mortgage and the Eleventh Circuit’s case permitted §506(d) to void a wholly unsecured mortgage, it held that Dewsnup was not “clearly on point” so that it was required to follow its own precedent.

The Supreme Court will now decide if §506(d) can be used to void wholly unsecured liens in Chapter 7 as the Eleventh Circuit now permits.

[1] The Eleventh Circuit consists of Alabama, Georgia and Florida.
[2] Dewsnup v. Timm, 502 U.S. 410 (S. Ct. 1992)
[3] Bank of America v. Caulkett, 566 Fed Appx. 897 (11th Cir. 2014) and Bank of America v. Toledo-Cardona, 556  Fed. Appx. 911 (11th Cir. 2014)
[4] 11 U.S.C.§506(d)
[5] 11 U.S.C.§506(a)
[6] 11 U.S.C.§502(a) and (b)
[7] Folendore v. U.S Small Bus. Admin., 862 F.2d 1537,(11th Cir. 1989).

The CFPB changes the rules…again

Profile Imageby Stephen Franks, Attorney

In an effort to level the playing field for consumers, the CFPB released a proposal for expanded foreclosure protections on November 20, 2014. The following are a summary of the topics the CFPB’s proposed rule changes cover:

- Loss mitigation options made available for borrowers who have brought their loans current and already utilized loss mitigation options
- Expanded protections for successor homeowners
- Servicers must promptly notify borrowers when a loss mitigation application is complete
- Protection for borrowers during service transfer if engaged in the loss  mitigation process
- Clarity for protecting a borrower from foreclosure sale while in loss mitigation
- Provide borrowers in bankruptcy with periodic statements containing bankruptcy-tailored information

The proposals are open for public comment for the next 90 days.  For more information, please visit the CFPB’s website.

Does the Bankruptcy Court have the Authority to Surcharge Exemptions?

EbeckBy Keri P. Ebeck, Attorney

Law v. Siegel: The facts of the case are that Mr. Law (Debtor) filed for Chapter 7 bankruptcy protection. He valued his home in California at $363,348 and claimed a $75,000 homestead exemption, as well as listed two mortgage liens on the property in question: (1) to Washington Mutual Bank  for $147,156.52; and (2) to Lin’s Mortgage & Associates for $156,929.04. Due to the alleged amount of the mortgages on Mr. Law’s property and the claimed homestead exemption, there appeared to be no equity for the Bankruptcy Estate. It was determined through an adversary brought by the Chapter 7 Trustee that the alleged second mortgage to Lin’s Mortgage & Associates was fraudulent and did not exist except in the mind of Mr. Law. The adversary litigation to determine such was extensive, lengthy and cost approximately $500,000 in attorney fees for the Trustee. The bankruptcy court ruled that the debtor’s homestead exemption of $75,000 could be surcharged, making those funds available to pay a portion of the Trustee’s legal fees incurred.

The legal issue in question and up on a Writ of Certiorari (meaning to ask the Court to review the lower courts decision) to the U.S. Supreme Court was the surcharge of legal fees by the Bankruptcy Court, and its direct contradiction of a specific provision in the Bankruptcy Code, specifically §522(k). Under §522(k), homestead exemptions are not liable for administrative expenses of the bankruptcy estate and cannot be used for that purpose. As the legal fees incurred by the Chapter 7 Trustee are administrative expenses under §522, the Bankruptcy Court did not have the authority under §105(a) to surcharge the debtor’s homestead exemption as it directly contravened §522(k). Under §105(a), the bankruptcy court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of bankruptcy code. The question was whether §105(a) as previously explained allowed the Court to “surcharge” (meaning to charge the debtor’s homestead exemption for the trustee’s incurred attorney fees.) The Supreme Court stated that “the Bankruptcy Court thus violated §522′s express terms when it ordered that the $75,000 protected by Law’s homestead exemption be made available to pay Siegel’s attorney’s fees, an administrative expense. In doing so, the court exceeded the limits of its authority under §105(a) and its inherent powers.” [1]

The Supreme Court went on to state that its decision did not prevent the Chapter 7 Trustee or Bankruptcy Court from seeking other sanctions imposable against the debtor, such as denial of discharge, sanctions for bad-faith litigation and reimbursement of attorney fees as a result of the debtor’s fraud upon the Court in this matter. Additionally, because any sanctions awarded against the debtor would be post-petition, it would not be subject to the debtor’s discharge (should he receive one). Furthermore, the Court acknowledged that “fraudulent conduct in a bankruptcy case may also subject a debtor to criminal prosecution under 18 U.S.C. §152, which carries a maximum penalty of five years’ imprisonment.” [2]

Although under §522(b), the debtor’s homestead exemption is his, and his only to claim, “a debtor need not invoke an exemption to which the statute entitles him, but if he does, the court may not refuse to honor the exemption absent a valid statutory basis.” [3] In this case, the Bankruptcy Court did not have a valid statutory basis to impair the exemption; rather it directly contradicted another statute under the Bankruptcy Code. The Bankruptcy Court could not order the exemption to pay the Trustee’s fees, but did provide the Bankruptcy Estate and Trustee with other options within the Court’s discretion to sanction the debtor’s fraudulent conduct in this case. Overall, the Supreme Court case ruling places limitations on §105(a) and that bankruptcy courts should not be expanding this section, especially when it specifically contradicts another section under the Bankruptcy Code.


[1] Law v. Siegal, 134 S.Ct. 1188 (2014).
[2] Id.
[3] Id.