Archive for the 'Chapter 7' Category

New Bankruptcy Relief from Stay Forms to Take Effect in Northern District of Ohio

Published
by
Scott Fink
on February 26, 2010
in Bankruptcy Filings, Chapter 11, Chapter 13 and Chapter 7
. 0 Comments

On February 23, 2010, it was announced that the Bankruptcy Court for the Northern District of Ohio will begin utilizing new forms for the filing of Relief from Stay Motions in Chapter 7, Chapter 13 and Chapter 11.  The forms will need to be used for any motions filed on or after April 1, 2010.

The Bankruptcy Courts affected include:  Cleveland, Toledo, Akron, Canton and Youngstown.  The new forms will require much of the same information as had been provided by creditors previously.  However, the forms will require greater specificity as to the calculation of the total balance and arrears owing on a loan, as well as a more structured and detailed analysis of a creditor’s right to enforce the Note, Mortgage or Security Agreement.

No new forms will be required by creditors filing only for Abandonment.  In addition, no new forms were created for the submission of agreed or stipulated orders.

The Bankruptcy Department at WW&R is reviewing the new forms and will provide a more detailed analysis in the coming weeks. If you have any questions, please contact Mr. Scott Fink, Esq. Scott is an Associate in the Bankruptcy department of the Brooklyn Heights office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 216.739.5644 or via e-mail at sfink@weltman.com.

Avoiding Preference Risk

Published
by
Nicole Kellner-Smith
on December 10, 2009
in Bankruptcy Filings, Chapter 11 and Chapter 7
. 0 Comments

By Kevin C. Susman, Associate

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 ksusman@weltman.com.

Chapter 7 Trustees Being Aggressive In Attempting To Avoid Mortgage Liens

Published
by
Brian Wood
on October 9, 2009
in Chapter 7 and Real Estate
. 0 Comments

Under Bankruptcy law, a Chapter 7 Trustee acquires the rights of a bona fide purchaser for value upon the filing of a Chapter 7 petition.  A bona fide purchaser takes real property subject only to liens that are properly perfected.  In cases where a lender’s mortgage was not executed in accordance with Ohio law, the Trustee is able to set the mortgage aside and sell the property free and clear of the lien.  The most common mistake that lenders make is not properly acknowledging the signatures of one or both of the debtors on the mortgage.  Ohio law requires that signatures of the mortgagors be acknowledged in the presence of a notary public.  Bankruptcy courts are routinely allowing Chapter 7 Trustees to avoid mortgages when the notary acknowledgment is not signed correctly.              

This issue arose recently during a case in which I was defending a mortgage lender in an avoidance action by the Trustee.  A husband and wife owned a piece of property jointly and granted my client a mortgage on the property to secure the loan.  The wife signed the mortgage on behalf of the husband pursuant to a valid power of attorney.  The wife subsequently filed a Chapter 7 bankruptcy.  The Chapter 7 Trustee filed an adversary complaint alleging that the mortgage loan was avoidable as to the husband, because the notary acknowledgment clause did not reference the wife’s signature on behalf of the husband.  The bankruptcy court ruled in my client’s favor, holding that the mortgage was signed pursuant to a power of attorney and that the notary’s acknowledgment of the wife’s signature was sufficient to convey the interest in the property.

Even though the bankruptcy court ruled in my client’s favor is this particular case, mortgage lenders need to be aware that Trustee’s are closely examining the notary acknowledgment section of mortgages.  Creditors should consult legal counsel for advice on the execution of mortgages in their respective jurisdictions.

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.)

Bankruptcy Filings Surge in the U.S.

Published
by
Alan Hochheiser
on April 14, 2009
in Chapter 11, Chapter 13 and Chapter 7
. 0 Comments

With the current state of the economy and massive job layoffs, the number of Bankruptcy filings in the U.S. has surged. The Associated Press reported that over the last 12 months, there have been over 1.2 million bankruptcy proceedings filed. In March of 2009, there was an increase of 46% on the number of filings from March 2008. The largest percentage of increases in filings is from the Western portion of the United States: Arizona, California, Idaho and Nevada leading the way.

Many experts are predicting that this is just the start of the surge. Some early projections are for 1.5 million bankruptcies to be filed in 2009. This is despite the fact that the Bankruptcy Cramdown Legislation may have reached a roadblock in the Senate. Many experts also believe the increase will continue into 2010.

It will be a challenging time for both financial intuitions and debtors. Weltman, Weinberg & Reis will continue to keep you updated on Bankruptcy trends in order to allow creditors to be in a position to protect their interests in the current environment.