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With the advent of the bankruptcy law changes in 2005, individuals have fewer alternatives when considering bankruptcy. An individual facing bankruptcy has three options to consider filing under, those being Chapter 7, Chapter 11 or Chapter 13 of the code. For a lender, the consumer’s choice of chapter has unique implications to be considered, and the devices and methods available to the lender under Chapter 7 will be considered in this article. The lender’s options for protective actions in Chapters 11 and 13 will be discussed in later articles.

Since Chapter 11 is typically used by small businesses we’ll start off by comparing Chapter 7 and 13 proceedings. The key difference between Chapter 7 and Chapter 13 is the repayment of debt. Chapter 7 is bankruptcy liquidation, meaning your assets are liquidated to pay lenders, with certain exceptions. Chapter 13 allows consumers with a regular income to establish a payment plan to pay back all or some of their debts to creditors, over a period of time.

To qualify for a Chapter 7 bankruptcy a consumer must obtain mandatory credit counseling within 180 days before filing bankruptcy, meet the means test and then file a petition and related schedules with the bankruptcy court. Upon filing, the automatic stay is put in place, which limits the actions of creditors and other pending legal actions. The court will appoint a Trustee to oversee the case. In a Chapter 7 a consumer’s assets (valued as of the date of the filing), with certain exceptions, will be liquidated and the proceeds will be used to pay creditors. At the termination of the matter the consumer will receive a discharge.

In this Chapter, a consumer’s home may be saved only if payments are kept current. Therefore, a lender should closely monitor the payments. If they are not made, the lender should refer the account to Bankruptcy Counsel who can then apply for relief from the automatic stay.

As a less costly alternative the lender can wait until the trustee has abandoned his interest and the debtor has been discharged in Bankruptcy and then start the foreclosure process (this is not recommended since the foreclosure process may take several months and the sooner one starts the process the more likely that a greater recovery will be achieved). Time almost never favors the lender in the current market and in the foreclosure process.

In this Chapter a loan secured by a vehicle must be kept current. A lender should closely monitor the payments and insurance for the collateral. If they are not timely made nor kept in place the lender should refer this to Bankruptcy Counsel who can then apply for relief from the automatic stay. The lender can also wait until the trustee has abandoned his interest and the debtor has been discharged in Bankruptcy and then start the repossession/replevin process but this is not recommended. This collateral is subject to vast depreciation and loss.

The consumer has one of four options:

1. He can keep the payments current
2. Redeem the vehicle for its value (usually NADA wholesale or its equivalent)
3. surrender the vehicle, or
4. reaffirm the debt

While reaffirmation achieves the ultimate protection for a creditor, the amendments to the bankruptcy code have made this path so arduous that it is seldom achieved and the time and energy spent make this an impractical choice in most instances. If reaffirmed and approved by the Court, the consumer is bound by the original contract and may be sued for a deficiency if he were to default.

Bari Gambacorta is a Shareholder in Stark & Stark’s Bankruptcy & Creditors' Rights Group in the Lawrenceville, New Jersey office. For questions, please contact Mr. Gambacorta.

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Jennifer D. Gould and Bari J. Gambacorta, Shareholders in Stark & Stark’s Bankruptcy & Creditor’s Rights Group, co-authored an article for the December edition of Equipment Finance Advisor entitled, Recent Cases and Bankruptcy Amendments Impacting Lessors.

The article discusses equipment leasing issues dealing with authentication of assignments of equipment leases and repossession of equipment when late payments are accepted after notice of default. The article provides a summary of these cases as well as recent amendments to the Federal Rules of Bankruptcy Procedure which may impact a lessor’s current business practices.

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The rise in bankruptcy filings has heightened the angst of contractors and suppliers working with residential builders who are worried that more companies will follow the path of Orleans Homebuilders and seek bankruptcy protection. To make matters worse, many contractors and suppliers will be pulled into the world of preference litigation, a very ugly experience.

Recently, the Unsecured Creditor Agent appointed by the Court in the Orleans Homebuilders bankruptcy case sent demand letters to select creditors of Orleans seeking to compel the creditors to return money they received during the 90 days before the filing of the bankruptcy case. In the end, many contractors and suppliers will be searching far and wide to understand why they have to return money to a company who stiffed them by filing for bankruptcy. This seemingly unfair consequence is the result of Congress’ inclusion of the preference laws in the United States Bankruptcy Code.

What Was Congress Thinking? One of the fundamental objectives of the bankruptcy law is to make certain that similarly situated creditors are treated equally and share in the distribution of the debtor’s assets on a pro-rata basis. To meet those objectives (and others) and avoid the pillaging of weak debtors during the slide into bankruptcy, Congress targeted certain types of pre-bankruptcy transactions, which result from the debtor providing preferential treatment to one or more creditors in the period leading up to the filing for bankruptcy. These transfers are known as “preferential transfers” and result in the debtor or trustee filing “preference actions” to attack the transactions and recover payments.

Policies and theories are often times hard to stomach, especially when you are a creditor subject to a preference action. Nevertheless, it is the law and many creditors involved in the Orleans Homebuilders bankruptcy case are about to feel the pain of being sued by a bankruptcy company.

What is a Preference Payment? The 90 days prior to the filing for any bankruptcy case is referred to as the “preference period.” The United States Bankruptcy Code allows a trustee to recover payments made to unsecured creditors during the preference period if certain conditions are met. To recover a preferential transfer, a trustee must prove the following five (5) factors:

1. A transfer of an interest in the debtor’s property;
2. Made within 90 days of the date of the bankruptcy filing;
3. Made on account of an antecedent debt (past due);
4. Made while the debtor was insolvent; and
5. Enables the creditor to receive more than it would receive if the debtor was liquidated in a Chapter 7 case (i.e. the assets sold).

The trustee must prove all five (5) elements. However, the trustee gets the advantage of a statutory presumption, which provides that for preference purposes, that the debtor is presumed to be insolvent during the 90 days before the bankruptcy is filed. Also, note that “transfer” does not just cover payments, but any transfer, including the granting of certain liens.

How Do I Defend a Preference Lawsuit? If you are a supplier to a company who has filed for bankruptcy protection and you receive a preference complaint, there are several practical tips for defending a preference action.

1. Defend The Case, Do Not Ignore It. It is very important to seek an attorney with bankruptcy experience immediately in order to avoid allowing the trustee to win by default. Under the rules governing bankruptcy cases, you have 30 days from the issuance of the summons to file an answer. Do not delay - get an answer filed or contact the plaintiff’s lawyer to obtain an extension of the deadline to file an answer.
2. Do Not Confuse a Preference Claim With a Fraud or Breach of Contract Case. Do not confuse a preference claim with any other type of litigation you have experienced - it is a world unto itself. It does not matter that you fully performed under the contract or delivered conforming goods or services. It also does not matter that your intentions were noble and your good graces allowed the debtor to string out your payments. Preference claims are very rigid and once the five (5) elements described above are satisfied, a preference claim has been established, subject to certain defenses. You need to focus your attack on the five (5) elements the trustee needs to prove and the statutory defenses set forth in the Bankruptcy Code.
3. The Facts. The facts, and nothing but the facts, are what may save the day. It is very important to explain to your attorney all of the facts surrounding the transfers. In terms of general facts, you need to explain to your attorney the nature of your business, how transactions are generally performed within your business, and how you generally bill and collect invoices. In terms of specific facts, you need to prepare a complete payment history of your relationship with the debtor, assemble all invoices and shipping documents, verify payments, assemble all letters, emails and faxes relating to any billing and collection activities, and any other appropriate documents.
4. Chart the Invoice and Payment Dates. To evaluate defenses to a preference action and to be prepared to meet with your attorney, you need to organize the most important information. The best way to do this is to prepare a payment history chart. The chart should have at least five (5) columns, showing the invoice number, invoice date, date check was received, date check cleared, amount of check and time between invoice date and payment date (measured in days). The last column which shows how many days after the invoice date the payment was made is crucial information in evaluating the ordinary course of business defense and new value defense. A properly prepared chart with supporting documentation will save you time and money when meeting with your attorney.
5. Think About Potential Expert Witnesses Within Your Industry. You may need an expert witness to give you a report that the payments made during the 90-day preference period fall within ordinary business terms. Your attorney will explain that one of the main defenses to a preference action is that the payments were made in the ordinary course of business. You may want to look to competitors or local trade groups to find an expert in your particular industry. Not all cases require experts, but some do. Get a jump on the selection of an expert by reviewing your files and identifying capable experts in your industry.
6. Retain Experienced Bankruptcy Counsel. Preference cases are very unique and outside the experience of many lawyers. Bankruptcy lawyers are a somewhat tight group and is helpful to have an attorney who has litigated cases with the trustee in other matters. Also, you want to make certain that the trustee is forced to prove his entire case and all affirmative defenses are analyzed.
7. Reality Check - Some Cases Are Hard to Defend. Sometimes the trustee has a strong case and there are no affirmative defenses available. In this situation, your attorney needs to attempt to settle the case early at a favorable number. If you let emotion get in the way of sound business judgment, the end result may be unpleasant. An experienced lawyer can give you an honest opinion of your case and if it is very weak, find a way to gain some leverage to settle the case before you incur substantial legal and expert fees.

Preference claims often times result in unfair results. However, the fact remains that most large Chapter 11 cases end with a slew of preference actions. If you receive a preference complaint, immediately start working on your defense and get to an experience lawyer who can help you go on the offensive.

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Jeffrey S. Posta, Shareholder in Stark & Stark Bankruptcy& Creditor’s Rights Group, authored the article, Ponzi Schemes-Will They Ever End?, for World Leasing News.

The article discusses the recent rise in “Ponzi” and “Pyramid” schemes and the differences between the different types of scams. Mr. Posta also discusses the more recent schemes perpetuated by Tom Petters, Allen Stanford and Bernard Madoff. Mr. Posta states, “These schemes actually differ somewhat in their design. Pyramid schemes promise investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods. They may purport to sell a product, but often simply use the product to hide their pyramid structure. Some tell-tale signs that a product is simply being used to disguise a pyramid scheme are inventory loading and a lack of retail sales.”

You can read the full article online here.

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In a recent decision, our firm successfully defended an Association’s ability to collect post-petition assessments in a Chapter 7 bankruptcy case. The decision reaffirmed the 2005 amendments to the Bankruptcy Code. Following these Amendments, a debtor remains liable for post-petition assessments, so long as he or she holds “mere” legal title ownership.  
 

In In re Brown, Bankruptcy Judge Donald Steckroth held that a debtor remained liable for post-petition association assessments in a Chapter 7 proceeding. This liability remained, even after the unit was abandoned by the Trustee and the debtor did not live at the unit, so long as the debtor held legal title. 
 

The matter was brought before the Court on the debtor’s motion to compel the Association to release monies levied in a bank account, post-petition, after the bankruptcy case was closed. As background, the Association had received a state court judgment for only post-petition amounts, and subsequently levied on the debtor’s bank account. Prior to filing the motion, the debtor requested the bankruptcy case be reopened so that she could list the Association as a creditor, since she had failed to provide initial notice to the Association. After the bankruptcy case was reopened, the debtor then filed the motion against the Association, claiming that the subsequent levy was improper.

2005 Amendments to the Bankruptcy Code
After extensive oral argument, the Court found that the 2005 Amendments to the Bankruptcy Code clearly widened the scope of non-dischargeability under § 523(a)(16). The statute provides that a chapter 7 discharge:                       

“...does not discharge an individual debtor from any debt...for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor's interest in a unit that has condominium ownership...for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot...” (Emph. added).

As such, the Court ruled that the debtor remained liable for post-petition assessments.

Know Your Collection Rights in a Bankruptcy Case
Unit owners often feel that once they file a chapter 7 bankruptcy case and vacate the unit that they are free from the duty to pay their assessments to the Association. This decision validates and supports an Association’s efforts to ensure owner payment of these assessments.

Associations should not “give up” when bankruptcy is filed. When an Association knows its rights, and has counsel experienced in representing Associations vis-à-vis bankrupt owners, it can successfully navigate an owner’s bankruptcy and recover unpaid assessments.

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Timothy P. Duggan, Shareholder and Chair of Stark & Stark's Bankruptcy & Creditor's Rights Group, authored the article What to do When the Bank Comes Knocking at Your Door for the October issue of the New Jersey Lawyer.

The article discusses the various options available when dealing with defaulted loans and provides an overview of the more important issues and challenges attorneys face when negotiating a commercial workout or loan modification with a lender.

You can read the full article online here. (PDF)

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Thomas S. Onder, Shareholder in Stark & Stark’s Bankruptcy & Creditor’s Rights Group, will present a seminar as part of the Mercer County Bar Association’s Xtreme CLE program. The seminar entitled, Bankruptcy for Non‐ Bankruptcy Attorneys, will take place Wednesday October 27, 2010 from 10:30 AM – 12:30 PM at the Conference Center at Mercer County Community College in West Windsor, New Jersey.

Mr. Onder will join the Honorable Kathryn C. Ferguson, U.S.B.J., and Graig P. Corveleyn, Esq. as they guide the non‐bankruptcy attorney through the twists and turns of the bankruptcy process. For registration information, please contact the Mercer County Bar Association.

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Receiving notice that a unit owner has filed for Chapter 13 Bankruptcy Protection is not the end of a Homeowner’s Association, Cooperative or Condominium Association’s (collectively referred to as the "Association") rights to receive unpaid Association fees. However, action must  be taken by the Association quickly in order to preserve its rights in the bankruptcy proceeding. A proof of claim should be filed to ensure that the amount of the pre-bankruptcy debt, including all arrearages, are properly documented. If a proof of claim is not filed, the Association may lose its right to receive payment on account of its pre-bankruptcy claim.
 

Under the Rules of Court, an objection to confirmation of a Chapter 13 plan must be filed with the court and served within a defined time period. A properly filed proof of claim that asserts a claim that is greater than the scheduled amount of the claim or the amount of the claim designated in the plan by the unit owner, serves as an objection to confirmation as to the amount of the claim. The trustee will confirm the plan based upon the higher amount set forth in the proof of claim, but that is not the end of the matter. The unit owner has sixty days to challenge the amount of the Association’s claim by filing a motion with the court. Thus, the Association must take affirmative action to secure its rights at the time notice of a Chapter 13 petition is received and during the confirmation proceedings. The Association must also monitor the case for sixty days following confirmation of the plan in case the unit owner decides to challenge the Association’s claim.
 

Stark & Stark’s Bankruptcy Group has filed numerous proof of claims in Chapter 13 matters and has monitored the claims process from start to finish. To ensure that your Association is protected, contact us as soon as notice of the filing of a Chapter 13 case is received.
 

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In a letter opinion dated June 14, 2010, the Bankruptcy Court confirmed that under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) a debtor is not required to contribute money to a Chapter 13 Plan that is presently being used to repay a loan borrowed against a 401(k) plan. However, a creditor(s) challenging the confirmation of the plan may (1) inquire as to the terms of repayment and (2) the debtor may be required to propose a plan that steps up payment at a later date. 

In In Re Todd R. Roth, 10-13287 (JHW), the largest unsecured creditor of the debtor, a law firm, filed a motion to dismiss the debtor’s Chapter 13 case and objected to the confirmation of the Plan. The Court scheduled an evidentiary hearing to decide the motion to dismiss, but addressed the movant’s objection to the confirmation of the Plan.

As to confirmation of the Plan, the moving creditor argued that 401(k) contributions and repayments of a loan from a 401(k) account constitute disposable income that should be dedicated to pay unsecured creditors under the Plan. In opposition, the debtor submitted that post-BAPCPA, regular 401(k) contributions and repayment of a loan from a 401(k) account do not qualify as disposable income. The Court rejected the creditor’s arguments because, under BAPCPA, money being contributed to a 401(k) plan and money being used to repay a 401 (k) loan are not deemed disposable income.

However, the Court recognized that money utilized towards the repayment of a 401(k) loan should be reduced as the loan is repaid. As such, a creditor may inquire about the repayment terms of the loan. Consequently, the debtor may be required to propose a plan that steps up payment at a later date. For example, if the bankruptcy plan is for five years, but the loan will be repaid in two years, payments to creditors must increase at the beginning of the third year. In support, Court relied upon an unpublished bankruptcy court opinion that held that a step up plan may be required to include amounts presently being used to service a 401 (k) loan.

The Bankruptcy Court’s letter opinion highlights the need for a creditor objecting to a Chapter 13 Plan to request information and documentation pertaining to the length and repayment terms of a voluntary pension loan. The debtor may be required to pay additional money under the Plan, but without diligent investigation by creditor’s counsel, the terms of repayment of the loan may not be disclosed.

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Jeffrey S. Posta, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights Group, authored the article, So You Thought You Had A Lease? for the April 2010 Lease Enforcement Attorney Network Newsletter.

In the article, Mr. Posta states that there is uncertainty in the law about whether a transaction is a sale or a true lease, and stresses that this distinction is especially important when and if the owner/lessee of an asset files for bankruptcy. Mr. Posta advises lessors desiring true lease treatment to carefully document their transactions in order to protect their interests.

You can read the full article online here.

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