Author Archive for Beth Schenz

Bankruptcy & The Economy: A Valuable Session

Published
by
Beth Schenz
on May 6, 2010
in Bankruptcy Court, Bankruptcy Filings, Chapter 11, Chapter 13 and Chapter 7
. 0 Comments

Cleveland, Ohio – May 6, 2010

The William J. O’Neill Regional Bankruptcy Institute, a part of the Cleveland Metropolitan Bar Association, is conducting a bankruptcy seminar offering an entertaining and comprehensive approach to the latest and best in the bankruptcy and insolvency arenas at the Marriott at Key Tower on May 12 and 13.  The two-day seminar, “What Hath the Great Recession Wrought: The Bend, The Bar and Congress Respond,” will feature regionally and nationally recognized speakers, including principal attorneys and judges from some of the nation’s highest-profile bankruptcy cases.

Beth Ann Schenz, an attorney in the Bankruptcy Department at Weltman, Weinberg & Reis Co., L.P.A. (WWR) played an integral part in putting together these dynamic presentations.  Over the last year, Ms. Schenz was Co-Chair of the 2010 Institute.  This undertaking involved coordinating over 58 speakers including 12 federal judges to speak on issues which touch the very heart of our economy.  For more information or if you would like to attend the discussion, visit www.clemetrobar.org/ONeill_Bankruptcy_Institute.aspx. 

The following is a capsule of some of the hot topics that will be discussed: 

Revitalizing a City
With lackluster economic growth, high jobless rates and dynamic talent loss in most of Midwest Cities, this lunch will focus on how a region turns around these staggering statistics.  The luncheon discussion will focus on the positive efforts that area organizations have gained over the course of the last year and what efforts they have planned to help propel this region into a strong, vibrant economic force.

Who Is Behind the Bankruptcy Statistics
The country continues to see statistics of the overwhelming amounts of people filing bankruptcy.  With bankruptcy numbers continuing to rise, the questions that are never asked are: what is behind the numbers, who are behind the numbers and what circumstances are behind the numbers.  This speaker will address those questions by taking the academia approach mainstream.  By understanding the numbers, community and economic leaders can address the situation and make policy that will help our economic future.  

Why Are They Too Big to Fail – We Have Chapter 11
Lead counsel from the Chrysler and Lehman Brothers bankruptcies will discuss the effect on bankruptcy sales of the Second Circuit’s ruling in Chrysler, and of Judge Peck’s recent decision allowing a lawsuit to proceed against Barclay’s, the bankruptcy purchaser of Lehman’s.   These disputes have reshaped the business landscape in important ways. This will be a great discussion considering the ongoing news stories involving companies and banks that are too big to fail.  Also, the discussion will continue on what is in the future of Chapter 11 bankruptcies.

Victims of Madoff & Other Ponzi Schemes
Irving Picard will lead a panel of the primary participants in the Madoff case.  They will review the hotly-litigated issues governing distributions to victims of the Ponzi scheme fraud. 

What is the Federal Legislature Doing
John Rao of the National Consumer Law Center and William A. Brandt, Jr. DSI are no strangers to Washington D.C.  Come hear what they have to say.

Loan Modification Ordered in Bankruptcy
Economic Issues before the Bench is a panel consisting of Judge Drain, Judge Isgur and Judge Morgenstern-Clarren.  Of note is Judge Drain’s piece on court-ordered loan modification procedures, which forces the creditor to enter into talks on loss mitigation.

If you have any questions regarding this bankruptcy seminar or would like a copy of the seminar materials, please contact Beth Schenz. Beth is an associate in the Bankruptcy department of WWR located in the Brooklyn Heights office. She can be reached directly at 216.739.5645 or via email at bschenz@weltman.com.

Pandora’s Box Opens: Chapter 13 Plans May Be Final Even If Contrary to the Bankruptcy Code

Published
by
Beth Schenz
on March 24, 2010
in Bankruptcy Filings, Chapter 13 and Federal Rules of Bankruptcy Procedure
. 0 Comments

By Beth Ann Schenz, Esq. and Milan Kubat, Esq.

The Supreme Court admits that its decision from March 23, 2010, “is potential for bad-faith litigation tactics” by debtors. 

The Facts
A Chapter 13 debtor listed his student loan debt in his plan.  In the Chapter 13 plan, the debtor proposed to repay only the principal while the remainder (accrued interest) would be discharged.  The United States Department of Education (the “Government”) did not object to the plan or appeal the order confirming the plan.  During the bankruptcy case, the Government filed a proof of claim and received the principal on the debt.  When the Government proceeded to collect on the debt after the debtor received a discharge in the Chapter 13, the debtor filed a motion to enforce the discharge order and direct the Government to cease all collection efforts.  The Government responded to the debtor’s motion to enforce and filed a motion under Federal Rule 60(b)(4) to set aside the confirmation order as void. 

The Court’s Ruling
Whether the confirmation order is void was the focus of the Supreme Court’s ruling.  For a judgment to be void, there must be some jurisdictional issue (the court does not have the power to hear the matter) or a due process issues (the creditor did not receive sufficient notice to defend the matter).  The Supreme Court states that there was no jurisdictional error or due process violation so the confirmation order providing for a discharge on student loans is binding on the creditor. 

Normally, a Chapter 13 debtor receives a discharge for all his or her debts except in some situations.  One example where a Chapter 13 debtor would not receive a discharge is under 11 U.S.C. §523(a)(8) – the student loan exception.  Some student loans are excepted from discharge and such exception is self-executing.  The caveat is that the Court can find that such non-dischargeable student loans create an undue hardship for the debtor and can be discharged.  According to the Bankruptcy Rules, such action requesting a finding of undue hardship is brought by the debtor in an adversary proceeding upon summons and complaint. 

The Supreme Court found that the undue hardship provision in the Bankruptcy Code is not a limitation on the bankruptcy court’s jurisdiction but only a precondition to obtaining a discharge order.  Also, the Court stated that the Bankruptcy Rules that require a complaint to be brought to determine undue hardship are only procedural rules and not jurisdictional rules.  Therefore the confirmation order was well within the jurisdictional authority of the Bankruptcy Court and can not be determined as void. 

On the positive side, the Court found that, “[g]iven the Code’s clear and self-executing requirement for an undue hardship determination, the Bankruptcy Court’s failure to find undue hardship before confirming the plan was a legal error.”  Unfortunately for the Government, a legal error does not make an order void.

Going further, the Supreme Court stated that the Government’s due process rights were not violated as they had ample time to either object to the Chapter 13 plan or appeal the confirmation order.  A finding of due process by the Supreme Court means that the confirmation order can not be found as void.

Where the Supreme Court said that the lower court’s ruling went too far is when they considered that any plan can be confirmed if it provides for a discharge of a non-dischargeable debt.  “Failure to comply with the self-executing requirement should prevent confirmation of the plan even if the creditor fails to object, or to appear in the proceeding at all.”

What This Means To You
A debtor can put any provision in his or her plan, which may be contrary to the code (i.e. discharging a debt that is otherwise non-dischargeable).  This provision should prevent confirmation.  However, the creditor may be bound under the order if the Chapter 13 plan confirms.  If the creditor fails to object to the plan or appeal the confirmation order in a timely manner, the confirmation order whether contrary to the Bankruptcy Code or not will be binding on the creditor.

As a creditor, you will need to make a business decision whether to object or not. WWR can help guide you through the decision making process.

If you have any questions concerning this matter, please contact Ms. Beth Ann Schenz, Esq. or Mr. Milan Kubat, Esq.  Beth is an associate in the Bankruptcy department located in the Brooklyn Heights office. She can be reached directly at 216-739-5645 or via email at bschenz@weltman.com. Milan is also an associate in the Bankruptcy department located in the Brooklyn Heights office. He can be reached directly at 216-739-5647 or via email at mkubat@weltman.com.

Business Bankruptcies: Outlook for 2010 and What You Should Know

Published
by
Beth Schenz
on February 5, 2010
in Bankruptcy Filings and Chapter 11
. 0 Comments

While they became stronger in 2009 (yes they became stronger), the financial institutions were more willing to write off the bad debts of companies and were less likely to restructure debts when companies became delinquent.  The result became a substantial increase in business bankruptcy filings in 2009.  The number of businesses filing for bankruptcy in 2009 increased by 38% from the numbers reported in 2008(1). 

The other factor that contributed to the substantial increase in business bankruptcy filings is the economy.  With the high costs of gas, materials and food coupled with low consumer turnout in the marketplace, businesses’ profit margins were unable to meet the demands of the companies’ debts. 

Along with the increase in business bankruptcy filings in 2009, companies’ default rates hit a record high in 2009(2).    While some experts predict that the growth of business bankruptcies will taper off in 2010, the majority of experts think otherwise.  Such factors as being unable to find financing, being unable to instill consumer confidence due to high unemployment and foreclosures and being unable to handle defaults in the commercial real estate industry, means that a slowdown in business bankruptcy filings is unlikely.  The industries that are most suspect to seeing business bankruptcy filings are retail, media, commercial real estate and transportation. 

With the increase number on business bankruptcy filings, creditors need to monitor accounts closer.  The following are some general tips to make sure you are on top of the situation.

Tips for Chapter 11 Creditors with Claim:

  1. Have a game plan on what you as a lender want from the company.  What will yield the best return for you- liquidation or being patience to see if the company will become viable
  2. If you have a first lien on all the business assets, you will need to seek attorney representation to begin negotiations with the debtor in possession(3).   Many times these negotiations may take place prior to the filing.  The most important items as a first lien holder are to protect your first lien position post bankruptcy filing as well as receiving adequate protection payments while waiting for the Chapter 11 Plan to be confirmed.  Look out for a Motion to Use Cash Collateral, which generally is one of the first motions filed after a bankruptcy petition
  3. All creditors holding a secured claim need to make sure that the Debtor in Possession does not attempt to modify the loan contrary to bankruptcy law.  Consult an attorney if you do not agree with any treatment of your claim.  Look out for Disclosure Statements, Chapter 11 Plans or any Motions that might affect your claim (Motion to Sell Property, Motion to Avoid Lien)
  4. File your Proof of Claim
  5. Be on the Creditor’s Committee, if applicable

—————————–

(1)Information pulled from Automated Access to Court Electronic Records (AACER)

(2)Information pulled from Standard & Poor’s

(3)Debtor in Possession is a technical term used in bankruptcy.  In essence, the Debtor in Possession is the debtor

Debtors Not Allowed to Retain If Current

Published
by
Beth Schenz
on October 7, 2009
in 2005 BAPCPA, Chapter 7 and Motor Vehicle
. 0 Comments

Most creditors are familiar with the phrase, “retain and pay”.  The bankruptcy code provides for certain treatment of debt, which is secured by personal property in Chapter 7 bankruptcies.  Specifically, the bankruptcy code provides that debtors must either reaffirm the existing debt, redeem the collateral or surrender the collateral (or assume or reject the lease.)  Prior to the amendments of the bankruptcy code in 2005, most debtors opted for the unwritten fourth option, “retain and pay.” 

However the 2005 amendment, “clearly provides that the debtor shall not only file a statement of intentions but also follow through with her express intent.”  If the intent is not followed through by the debtor in the statutory number of days, the automatic stay terminates and the property is no longer property of the estate. 

The Ninth Circuit Court of Appeals recently ruled that the “retain and pay” option is no longer viable.  If a debtor opts for this unwritten alternative then the debtor will fail to meet his/her statutory obligation and the automatic stay will be terminated.  The mere termination of the automatic stay, however, is not enough to authorize the Creditor to repossess the collateral. 

In the case before the Ninth Circuit, the debtor’s failure to adhere to the code allowed for the stay’s termination.  Once the stay is terminated, the right to repossess the collateral then goes to the parties’ contract, in conjunction with state law to determine when the debtor has a default on the automobile loan and if that default allows repossession.  The debtor’s contract in the Ninth Circuit case contained an ipso facto clause that provided a default if the debtor filed for bankruptcy.

There is a bankruptcy code provision that, “generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a of a bankruptcy case.”(1)  However, the 2005 amendment overrides the provision that renders ipso facto clauses unenforceable when debtors fail to state an applicable intention and also fail to perform that intention.

Learning Points

  • Offer reaffirmation agreements (If a reaffirmation is offered but denied by the Bankruptcy Court then the creditor cannot repossess if debtors are current after bankruptcy)
  • Contracts should contain ipso facto clauses
  • Know your state law to make sure you can repossess the collateral
  • The above statutory provisions only apply to personal property

(1) Dumont v. Ford Motor Credit Company, Appellate Case No. 08-60002 (September 15, 2009 9th Cir.)

Not Gone and Not Forgotten: Bankruptcy Reform and Cram Down

Published
by
Beth Schenz
on August 26, 2009
in Bankruptcy Act 2009 and Real Estate
. 0 Comments

Last month, House Financial Services Committee Chairman Barney Frank (MA- D) indicated that he would revive the bankruptcy legislation that would allow debtors to cram down first mortgages.  Specifically, if the banks did not increase their efforts to modify existing home loans, Franks stated that he would revisit the bankruptcy cram down legislation. 

Not only is the House threatening bankruptcy cram down legislation but the Senate Committee on the Judiciary, Subcommittee on the Administrative Oversight and Courts is also reviewing recommendations on modifying mortgages in bankruptcy.  

On August 20, 2009, the Senate Committee scheduled a hearing on “Mortgage Modifications during the Foreclosure Crisis: Is there a Role for Bankruptcy Courts?” At the August 20, 2009 hearing, testimony was taken from multiple homeowners on their negative experiences with loan modifications.  Also, Susan Bodington, Deputy Director for Programs, Rhode Island Housing testified that, “[b]ankruptcy reform could provide the incentive or pressure to expedite workouts and collaborate more effectively, but it should be structured in such a way that it does not penalize responsible lenders who made fair loans that were in the best interest of the customers when the loan was made, and who have worked with their customers compassionately to keep them in their homes.”  In his testimony, John Rao, attorney for National Consumer Law Center, strongly urged the need for bankruptcy reform.  Mr. Rao stated, “[a]doption of court-supervised mortgage loan modifications would sidestep many of the structural barriers in the servicing industry that today are preventing mass loan modifications from occurring.”

Before recess on July 23, 2009, the Senate Committee took testimony on “The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform?” (See previous blog entry).

While such government agencies like the Federal Housing Finance Agency have taken the unofficial position that forcing people into bankruptcy is the wrong solution and loan modification is the solution, loan modifications still remain low.  Currently, the treasury department is reporting that only 9% of eligible borrowers received modifications. 

The continuing rise in foreclosures, the high level of unemployment and the lack luster of loan modifications are creating pressure for Congress to revisit bankruptcy reform.  While once bankruptcy practitioners felt that the bankruptcy reform that would allow debtors to “cram down” their mortgage debt to the value of the real property was defeated in Congress, the case for bankruptcy reform still looms.