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The Middle District of Florida has a new Chief Bankruptcy Judge. The Honorable Karen S. Jennemann replaced Judge Paul Glenn and commenced her four year term on October 1, 2011. Chief Judge Jennemann sits in the Orlando Division of the Middle District. To assist with Chief Judge Jennemann’s caseload, as she now takes on the administrative duties of Chief Judge, the Honorable Benjamin Cohen of the Northern District of Alabama has been approved to sit with the Bankruptcy Court for the Middle District of Florida. Judge Cohen has already began assisting the Orlando Division. We look forward to working with Judge Cohen and learning his preferences and particularities.
Chief Judge Jennemann has said one of her first priorities will be effectuating greater uniformity to Middle District bankruptcy practice. Currently the Middle District of Florida, the second busiest bankruptcy court in the nation, consists of three divisions: Tampa, Jacksonville, and Orlando; and one sub-division: Ft. Myers. There are eight permanent judges, and with the addition of Judge Cohen, three judges loaned from other states. Each of the three major divisions in the Middle District have often acted as independent districts, with rules dictated by administrative orders, or just traditional practice. This can be confusing to the participants in the bankruptcy process, and result in errors, delays, and confusion.
Chief Judge Jennemann’s first step in her effort to create a uniform practice in the Middle District affects Jacksonville. Starting January 1, 2012, Jacksonville negative-notice Motions for Relief will have the same negative-notice time as Tampa and Orlando. Now a Motion for Relief filed on negative notice in Jacksonville will be eligible for default 21 days from the date of filing. Future steps will include a uniform model Chapter 13 plan, and uniform rules for mediations for mortgage modifications.
We believe uniformed rules and procedures in the Middle District Bankruptcy Courts will lead to more efficiency, certainty, and will ultimately benefit creditors. We will continue to keep our clients informed of significant changes in practice and procedure, and as always look forward to fielding any questions or concerns.
If you have any questions on this matter, please contact Mr. Damian A. Valladares, Esq. Damian is an associate attorney practicing in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA, focused on bankruptcy services. Based in the Ft. Lauderdale, Florida office, Damian can be reached at 954.740.5234 and .
There has been a new and important development in bankruptcies in the Southern District of Florida on the subject of objections to creditors’ Proofs of Claims. Responding to what he perceived to be a pervasive practice among debtors’ attorneys, last week Judge John K. Olson of the Fort Lauderdale Division, issued an order in which he imposed sanctions on several attorneys representing individual bankruptcy debtors for filing and prosecuting unwarranted or overzealous claim objections. In summary, the Court found that objections filed to dispute timely filed creditors’ proofs of claims which matched or nearly matched the amount of debts listed on the debtor’s schedules were in violation of Rule 9011(b) of the Federal Rules of Bankruptcy Procedure.
In most of the cases cited by the Court in its decision, the claims were scheduled by the debtors as non-contingent, liquidated and undisputed in amounts either identical or substantially identical to the filed Proofs of Claim. The Court held that the objections to claims of creditors which sought to strike claims in their entirety, most often based on “lack of documentation to support claim,” or “Debtor disputes amount owed,” constituted objective bad faith by the debtors’ attorneys, “in a manner designed to avoid reasonable review of the claims register” as required by Local Rule. Importantly, the Court states unequivocally that objections based on “lack of documentation” or “disputed amount owed” are not grounds to strike and disallow a claim, as the exclusive grounds for doing so are enumerated in section 502(b) of the Bankruptcy Code.
Going forward, this ruling will have a great effect on the Chapter 13 bankruptcy practice in the Southern District of Florida. We believe that this ruling highlights the importance of filing Proofs of Claim in individual Chapter 13 cases, including principal balance proofs of claims where the debtor is current in his/her payments, and cases where the property is surrendered in the debtor’s Chapter 13 Plan. There is no basis in section 502(b) to disallow such claims, and the filing of such a claim will help to protect your interests regardless of the treatment of the property in the Chapter 13 Plan. We also believe that this ruling will reduce the number of frivolous claim objections we face on a regular basis. It further provides ample grounds to seek reimbursement of attorneys’ fees when forced to defend a frivolous claim objection, and we therefore recommend including a prayer for attorneys’ fees in each litigated claim objection. In the case where the same debtor’s attorney repeatedly goes forward with claim objections, like those described by the Court which we believe will be rare going forward in light of this ruling, we can seek more serious sanctions.
If you have any questions on this matter, please contact Damian A. Valladares, Esq. Damian is an associate focused on bankruptcy services in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA based in the Ft. Lauderdale office. He can be reached at 954.740.5234 or .
Recently, lenders/credit unions in Pennsylvania have been advised by debtors of their intentions and wishes to reaffirm unsecured lines of credit and/or visa loans in order to maintain their good relationship with the lending institution. With increasingly stringent lending practices and approval on loans being harder to secure, debtors are doing so in the hopes that the debtor(s)’ bankruptcy filing does not affect their chances in the future with such lending institution to receive approval on additional loans.
Upon such requests being received, the lenders/credit unions have been requesting reaffirmation agreements be prepared and sent to the debtors(s) and/or their counsel for review and execution. If feasible, the debtors(s) and their counsels are executing such reaffirmation agreements, even though this technically thwarts the act of Chapter 7 bankruptcy itself; to discharge all unsecured debt and to allow the debtor a clean start.
The issue arises when the reaffirmation agreement is filed with the court. The bankruptcy court in the Western District of Pennsylvania is declined to approve such reaffirmation agreements. The court is scheduling hearings on such agreements and even upon the agreement and recommendation of both parties and their counsels; the courts are not issuing orders to approve the reaffirmation of any unsecured debt. As explained by one judge in the Western District of PA, regardless of the reason for wanting to reaffirm, he would not approve (even if it did not pose an undue hardship on the debtor) an agreement to reaffirm an unsecured debt, as the debtor filed bankruptcy in order to discharge such debts. Generally, in his opinion, what would be the point of filing bankruptcy, if upon discharge the debtor still owed thousands of dollars in unsecured credit card debt? The judge went on to say that he could not see any instance where he would approve such an agreement.
Upon review of 11 U.S.C. §524(m)(1) and (2), the code is clear that approval based on presumption of undue hardship does not apply to credit unions. Whether or not these sections leave room for discretion for the judge to deny based not upon presumption of undue hardship but based solely upon the fact of the debt being unsecured is left undetermined and such order could be appealable.
While the good intentions of the debtor(s) may be to maintain responsibility for his/her debts to certain lenders/credit unions, and likewise of the lender to try and collect upon a debt that nonetheless would be discharged, the courts, regardless of the intentions and/or reasoning of the parties, are not willing to reach beyond and approve such agreements.
If you have any questions on this matter, please contact Ms. Keri P. Claeys, Esq. Keri is an associate in the bankruptcy group located in the Pittsburgh office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 412-338-7102 or .
Creditors doing business with entities they suspect are on the verge of filing for bankruptcy protection need to be aware that they may be required to return the payments received from that entity within the 90 days preceding a bankruptcy filing. Whether you are a party to litigation entering into a settlement agreement, a trade creditor contemplating a compromise of a delinquent account, a lender negotiating a workout, or simply conducting business as usual, all dealings with financially troubled parties should be approached with an eye on avoiding preference risk.
Section 547 of the Bankruptcy Code permits a debtor-in-possession in a Chapter 11 (reorganization) case, or a bankruptcy trustee in a Chapter 7 (liquidation) case, to recover certain payments made to the debtor’s general creditors within 90 days (or one year if the payments went to “insiders” of the “debtors”) prior to the petition filing date for the bankruptcy. Such payments are considered “preference” payments, or just “preferences”.
The purpose of this portion of the Code is to discourage creditors from taking extraordinary collection measures against a potential debtor in the immediate, pre-bankruptcy period. In at least some cases, if creditors do not panic, the debtor can successfully work through the financial issues that trouble it and resume ordinary payment of its bills. But if creditors push, there is a perceived rush on the debtor to collect everything possible.
For example, preferential payments to the debtor’s “favorite” creditor who holds a personal guarantee by the debtor’s principal or to the creditor who can hurt the debtor the most do not reflect the bankruptcy policy of equality of treatment for all creditors. Bankruptcy law can compel a creditor to disgorge monies received in excess of its fair share of the debtor’s assets.
If a creditor receives a letter or call from debtor’s bankruptcy counsel about a potential preference claim the creditor should not automatically refund the payment(s). There are potential defenses against repayment and, in any event, it’s a negotiation game, particularly if the demand is for a relatively small sum. If negotiation does not settle the claim, the debtor or the trustee can file suit against you in the bankruptcy court. Even if suit is filed, the claim probably still can be settled by negotiation.
The Bankruptcy Code provides several defenses to preference liability in order to encourage creditors to continue conducting business with a financially troubled debtor in the hope of avoiding a bankruptcy filing. The three most common defenses are (i) the contemporaneous exchange for new value, (ii) the subsequent new value and (iii) the ordinary course of business defenses.
The first of these three defenses prevents recovery of a payment when the transfer was intended by the debtor and creditor to be a contemporaneous exchange for new value given to the debtor and when such exchange was in fact substantially contemporaneous. New value is defined by the bankruptcy code as money or money’s worth in goods, services, or new credit, or a release by a transferee of property previously transferred, but does not include an obligation substituted for an existing obligation.
The “new value” rule requires that you demonstrate an essentially contemporaneous exchange of value between you and the creditor. After learning of a debtor’s bankruptcy filing, a creditor should account for all payments received within the 90 days preceding the filing and match those payments to goods shipped or services provided after the date of the oldest payment received within the preference period. This will allow the creditor to analyze the extent of its new value defense and potential liability to a preference attack, aiding in a cost-effective resolution of any preference demand.
The “ordinary course” defense protects recurring, customary credit transactions that are incurred and paid in the ordinary course of the debtor’s business and the creditor’s business. To successfully employ this defense it is imperative a creditor maintain detailed records of the dates that payments are received in relation to the dates invoices are generated in order to show that the pattern of payments received within the 90 day preference period is comparable to either industry statistics or the prior payment history between the parties. This defense highlights another common mistake of creditors, which is to restrict credit terms upon discovering a debtor is experiencing financial difficulty. Several courts have found that payments received after a creditor began restricting credit terms were not made within the ordinary course of business between the creditor and debtor. Rather than tighten or more strictly enforce credit terms, creditors should require prepayment in order to avail themselves of the new value defenses discussed above.
Although it may be impossible to completely eliminate all preference risk when dealing with a distressed entity, especially when drafting a settlement or workout agreement, there are strategies that can help reduce such risk. Further, given the available statutory defenses, if a payment received within the preference period is attacked as a preference, a compromise can likely be reached with the trustee that would prove more favorable to the creditor than the recovery that could be expected through the bankruptcy claims process.
Kevin C. Susman is an Associate in the Legal Action Recovery department of the Cleveland office of WWR. He can be reached at (216) 685-4298 or .
