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The Eleventh Circuit’s ruling in the Failla case was triumph for mortgage lenders when it affirmed the District Court’s opinion that “once the debtor decides to ‘surrender’ secured property… [w]hile the debtor need not physically deliver the property to the secured party, the debtor is precluded from taking any action which would interfere with the secured creditor’s ability to obtain legal title to, and possession of, the property through legal means.”

However, as set forth in the recent case of In re Kurzban, 2017 WL 3141915 (Bankr. S.D. Fla. July 24, 2017), “the Eleventh Circuit did not rule that a debtor’s decision to surrender lasted in perpetuity“.

In the Kurzban case, the mortgage lender sought to reopen the debtors’ 2009 chapter 7 bankruptcy case, over 7 years after the debtors received their discharge, to compel the debtors to surrender their real property, consistent with their bankruptcy Schedules.  The bankruptcy court noted that the bank had abandoned its foreclosure efforts, entered into modification negotiations with the debtors, seven years had passed since the debtors received their discharge and five years had passed since the bank’s first foreclosure action was voluntarily dismissed.  It was only after years of modification efforts proved unsuccessful, and the bank filed its second foreclosure action, that it sought to enforce the debtors’ surrender election years later.

Accordingly, the Kurzban court held that there was absolutely no basis under Failla decision to support the relief sought by the bank years later.  The Kurzban court reasoned that “a debtor’s decision to surrender may be binding in a foreclosure action pending, or ripe for filing, at the time of the bankruptcy case in which the intent to surrender is made, but it certainly is not binding in a subsequent foreclosure action…”

The take away for mortgage lenders where a debtor elects surrender?  Do NOT sit on your rights!  Be diligent in your efforts to foreclose and enforce your leverage under the Fialla case.

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

Section 363 of Title 11 of the United States Code (“Bankruptcy Code”) authorizes trustees (and Chapter 11 debtors-in-possession) to use, sell, or lease property of a debtor’s bankruptcy estate outside of the ordinary course of business upon bankruptcy court approval.  Some of the key benefits for purchasers are the ability to purchase assets free and clear of liens under Section 363(f) and obtain protections from adverse consequences of any appeal under Section 363(m).

Under 363(f), the trustee or debtor-in-possession may sell property of the debtor’s bankruptcy estate free and clear of all liens, claim and encumbrances as long as: (1) applicable non-bankruptcy law permits it; (2) the interested party consents; (3) such interest is a lien and the sale price of the property is greater than the value of all liens; (4) the interest of the interested party is in bona fide dispute; or (5) the interested party could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of its interest.

Once the Court finds that property of the Debtor’s estate can be sold to you pursuant to Section 363(f), you should ensure that the Order includes findings under Section 363(m) of the Bankruptcy Code that you purchased the property in “good faith”.  The practical implication of securing a 363(m) finding is that once you, as a the good faith purchaser, close on the sale (assuming the court does not grant a stay pending any appeal), the sale cannot be undone by reversal or modification of the sale order.  No one can “un-ring bell” (except in very rare situations…for instance, a bad faith involuntary case).

However, you cannot just assume that a 363(m) finding will occur.  Ensuring that you such a valuable finding requires some planning and work on your part.  If possible, you should take an active role in the trustee’s/debtor’s motion to approve the sale.  Remember, although the debtor or trustee generally makes a good faith presentation to the court, it is the purchaser’s burden to make sure the evidentiary burden has been met to establish good faith.

Some questions to consider:

Does the motion seek a good faith finding under Section 363(m) and at least an initial analysis of the factual basis for a good faith finding?

What are the relationships between the debtor and the proposed purchasers?

Is this an arms length transaction?

Is there any risk that potential bidders and/or the debtor could be accused of price controlling, anti-bid rigging, fraud or collusion during the auction process?

AND

Does the motion seek waiver of the 14 day stay of the sale order under Bankruptcy Rule 6004(h) – so that you can close immediately?  The ability to close sooner prevents delay and relieves that debtor/trustee from overhead and burden of securing the assets for 2 more weeks.

The bankruptcy sale process has its challenges, obstacles and traps for the unwary. However, with proper planning, it can yield optimal results for the seller, purchaser and creditors.

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

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“You have been served” – the famous phrase uttered by process servers everywhere, may never be heard by a bankruptcy defendant.

Why?

Well, Bankruptcy Rule 7004 bestows the rare privilege of nationwide service of process by FIRST CLASS U.S. MAIL of a Summons and Complaint on defendants (with a few exceptions).   In bankruptcy cases, a Summons and Complaint that comes in the mail is just as valid as if a process server knocked on your front door, handed you the lawsuit, looked you in the face and said, “you have been served.”

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Bankruptcy adversary proceedings move quickly, and generally an adversary defendant only has 30 days after the date of the issuance (not mailing, not receipt) of the Summons to respond to the Complaint.  A Scheduling Order often accompanies the Summons and Complaint and outlines all the substantive deadlines for discovery and trial leading up to the pretrial conference, which is generally within 90 days.

Accordingly, if you are served with a Summons in a bankruptcy case, notifying you that an adversary proceeding has been filed against you, best take it seriously and seek out legal advice from a qualified bankruptcy attorney as soon as possible!

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

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The recent decision in the Olivares case [2016 WL 6810716 (Bankr. S.D. Fla. 2016) reminds lenders of the perils of being a second mortgage holder where equity is questionable.

A lender that held a second mortgage on real property owned by the chapter 13 debtor objected to the debtor’s proposed plan on the basis that the debtor’s plan was filed in bad faith, not feasible and the debtor proposed to pay the first mortgage holder with out participating in the mortgage modification mediation program.  The debtor filed a motion to value the property and determine the secured status of the lender.

Unfortunately for the second mortgage holder, the decision of the Court came down to one issue, the determination that there was no equity in the property in excess of the first mortgage.  The lender conceded that there was no equity in the debtor’s real property.  Specifically, the property was valued at $459,544.00 and the amount owed on the first mortgage is $823,372.03.

The second lender attempted to make several objections that could have been raised by the first mortgage holder, but the Court found that the second mortgage holder could not argue objections belonging to a third party, including: 1) the debtor’s inability to meet the payment requirements of the first mortgage, 2) the veracity of the family members promises to help fund the first mortgage payments, and 3) bad faith for failure to participate in the MMM program.
The second mortgage holder also argued that the debtor could not strip off liens where the first mortgage is being “treated outside the plan”, but failed to cite any legal authority for their argument.
As a result, the Court found that the plan was proposed in good faith, confirmable, and the motion to value and strip off its lien should be granted.  The only solace for the second mortgage holder is that the lien strip is conditional upon the debtor’s successful completion of all payments under her chapter 13 Plan.
  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

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What is “redemption” in bankruptcy?

  • Redemption is an option available to Chapter 7 individual debtor (not corporations or business entities).
  • Redemption may allow the debtor to keep personal property (intended for personal, family, or household use) which is acting as collateral for a secured debt.
  • The most common example of personal property may be redeemed is an automobile.
  • The personal property is redeemed by paying the lienholder the amount of its allowed secured claim in full by one lump sum payment.  However, the road to redemption is oftentimes too difficult for debtors to travel because of the lump sum payment requirement.

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How does “redemption” work?

Suppose the debtor files for bankruptcy and still owes $20,000 to ABC Bank on her Honda Civic but, the car is now only worth $12,000.  In this scenario, ABC Bank has a debt secured by the vehicle up to its value ($12,000) and $8,000 that is essentially unsecured.

During the redemption process, the debtor can generally wipe out the unsecured portion (in this example, $8,000) by paying ABC Bank a lump sum of $12,000.  If the debtor chooses redemption and can follow through with payment, the debtor will own the car free and clear once the debtor receives her discharge.

If redemption is not an option, the debtor may be able to keep her Honda Civic by “reaffirming” the debt instead.  In that case, the debtor signs a “reaffirmation agreement” with ABC Bank prior to discharge where, the debtor agrees to again become legally obligated to pay all or portion of the entire debt owed by the debtor on the Honda Civic to ABC Bank, essentially excepting the debt from discharge.

Yet another option would be for the debtor to surrender her Honda Civic to ABC Bank.  In this case, assuming the debtor receives her discharge, she will no longer by liable for any debt to ABC Bank on the Honda Civic.

The decision whether to surrender, redeem, or reaffirm in bankruptcy is a difficult one and any debtor facing these issues will want to consult an experienced bankruptcy attorney before making any election.

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

 

At the end of my October blog post, Dear Debtor, You Said I was Your First Priority, a VIP!, I suggested that you might want to join a “support group” called the “Official Committee of Unsecured Creditors” (fondly referred to as the OCC or GUCCs), if you felt angry or depressed about your unsecured claim status.  Admittedly, I may have led you astray.

The OCC is not really a “support group,” at least in the conventional sense of the word. So, if it is not a support group, what is it?

Going back to my October post – you have come to the realization that you were not really a VIP to the Debtor and are not entitled to priority payment. Shortly after you admit you are a general unsecured creditor, you receive a letter from the U.S. Trustee’s Office telling you that they are forming an OCC in the Debtor’s Chapter 11 bankruptcy case and asking you if you would like to serve on the committee.

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Your first reaction is to say – Yes, pick me!  Of course I want to “be all I can be”.

Not so fast! Aren’t there some questions you want answered first like…what is the OCC?…what can the OCC do?…what are members of the OCC required to do?…and what are the dangers and benefits of being an OCC member?

Here are the answers to those questions…

The OCC is a committee appointed by the U.S. Trustee’s Office from unsecured creditors that hold the 20 largest claims against the Debtor. It represents the interest of all unsecured creditors of the debtor before the bankruptcy court and in negotiations with the debtor and other parties. Generally, there are 3 to 7 members, depending on the size of the case.

The OCC members are fiduciaries to the other unsecured creditors and are expected to act in the best interest of all unsecured creditors. As a member of the OCC you cannot favor your interest over those of other unsecured creditors.

Among other things, the OCC has the power to do the following:

  • consult with the chapter 11 debtor on administration of the case.
  • investigate the debtor’s conduct and operation of the business.
  • participate in formulating a plan.
  • may, with the court’s approval, hire an attorney, accountant or other professionals to assist in the performance of the committee’s duties. These professionals are compensated by the debtor.
  • monitor management of the debtor’s business.

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The Pros:

  • having a seat at the table and an opportunity to have a voice in the bankruptcy process.
  • legal representation of the committee, paid for by the debtor, that you would ordinarily not receive on your own.
  • access to information regarding the bankruptcy process and the debtor’s financial information, some of which is not readily available to individual creditors.
  • power to participate in and affect the debtor’s plan negotiations and negotiations with other creditors.

Possible Cons:

  • Serving as a committee member can be require a significant (uncompensated) time commitment. Are you sure you have the free time to commit?
  • Is the case out of town? You may need to travel there once in a while.
  • Since your duty is to act in the best interests of all unsecured creditors, you might have to endorse actions that would be detrimental to you and your claim.  Are you prepared to do that?

So – now that you are in the know about the OCC are you ready to “be all you can be” in your debtor’s bankruptcy case?

Before you say “yes,” serving on a creditors’ committee is an important decision. You should carefully weigh pros and cons of serving based on the facts surrounding your claim and your relationship with the debtor. Seek out a trusted bankruptcy attorney in your neck of the woods for advice.

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

In my May 26th post, I raised several questions that unsecured creditors in any Chapter 11 case should know the answers to and take action where appropriate.  One of those questions is “Am I entitled to priority payment?”  This is also important to answer in a Chapter 7 case.

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Your delinquent customer told you not to worry, you were first in line for payment, and that payment would be coming soon.  Next thing you know, your customer has filed a bankruptcy and you have not been paid.  As discussed in my June 24th post, you obtain a proof of claim form and are prepared to fill it out and file it before the deadline, but then you get to the last question, number 12 – “Is all or part of the claim entitled to priority under 11 U.S.C. § 507(a)?”

Your first impulse is to check “yes” – of course you are entitled to priority – the debtor told you that you were first place, a VIP for payment.

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NOT so fast…most creditors’ claims are “general” unsecured claims, and not entitled to priority treatment.  Take a breath and ask yourself, does my claim fit into any of the following categories:

  • domestic & child support obligation;
  • salary, wages, or benefits owed to an employee;
  • deposit of less than $2,850.00 towards the purchase, lease, or rental of property or services for personal, family, or household use;
  • claim for contribution to an employee benefit plan;
  • claim of grain farmer or fisherman relating to storage and processing facility;
  • certain unsecured taxes or penalties owed to the government;
  • claim for death or personal injury resulting from operation of a motor vehicle or vessel by an intoxicated debtor;
  • customs duty arising out of the importation of merchandise; or
  • claim based on commitment by the debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured deposition institution.

If you fall into one of these categories, GREAT, but chances are that you DO NOT!  Resist the urge to check “other”!  Check the “No” box, sign the bottom of the form and send it in.

Feeling angry and/or depressed?  If your customer is in Chapter 11, you may want to consider joining a support group – perhaps the “Official Committee of Unsecured Creditors” – fondly referred to as the OCC or GUCCs.  I’ll be back to discuss that in a future blog post!

Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP.  Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation.  You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

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The results are in!

As I mentioned in my May 25th blog post, Curtis James Jackson III, better known as rapper 50 Cent (“Jackson”) was scheduled for his bankruptcy confirmation hearing yesterday (July 6th).

All impaired creditor classes voted in to accept Jackson’s proposed plan of reorganization (“Repayment Plan”).  He filed his own declaration and the declarations of three professionals in support of his Repayment Plan at 11 am the morning of the hearing.

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No one sought to cross exam the declarants however, the Court did have Jackson take the stand to confirm that he understood his significant repayment obligations under the Repayment Plan and that the were freely undertaken by Jackson.

The Court was specifically concerned with whether Jackson understood the terms of his settlement with Lastonia Leviston (“Leviston”).

Jackson affirmed his understanding that: 1) Leviston had an allowed unsecured claim in the amount of $6 million; 2) as long as he made the payments under the Repayment Plan, she would be paid a percentage of her claim with other unsecured creditors; and 3) if he defaulted in those payments for any reason, her claim is non-dischargeable and that she could pursue the full amount of her claim against him.

When questioned about the possibility of default, Jackson stated “That’s not going to happen.”

He swore that he was committed to making the payments under the Repayment Plan and believed he could make them.

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The Court confirmed Jackson’s Repayment Plan and congratulated the parties and counsel for coming to consensual resolution of the differences that existed the first day they walked into her bankruptcy courtroom.

The Court further stated that is was pleased to confirm Jackson’s Repayment Plan – remarking that it was a significant event and praising Jackson for what it viewed as his very substantial effort to repay creditors.

If you want to read more on this significant event, several articles have been written on Jackson’s bankruptcy success story – Vibe, The Guardian, The Wrap, HipHopdx, NME, and TheYBF.

 

Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP.  Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation.  You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

 

In my May 26th post, I raised several questions that unsecured creditors in any Chapter 11 case should know the answers to and take action where appropriate.  In my prior posts, I have already addressed “first-day motions” and creditors’ meetings.  Let’s move on to three more questions about claims.

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The answers to these three questions are VERY important.  Why?  You may not be eligible to receive any money from the debtor if you do not know the answers and act accordingly!

1) Is my claim properly listed on the debtor’s Schedules?

This question is simple to answer.  Peruse the debtor’s Schedules filed with the Court and see if the debtor has listed you and whether the amount is correct.  If the answer is NO, you need to file a proof of claim before the deadline set by the Court.

2) Has the debtor listed my claim as disputed, unliquidated or contingent? 

The answer to this question is also simple.  Look at the box where your claim is listed (if it is listed) on the Schedules.  There is a section that says…

As of the petition filing date, the claim is:

Check all that apply.

¤   Contingent

¤   Unliquidated

¤   Disputed

If one of these boxes is checked, the answer is YES and you need to file a proof of claim before the deadline set by the Court.

3) When is the deadline to file a proof of claim? 

The clerk of the court (or in some instances the Debtor), send a notice out to all creditors LISTED on the debtor’s Schedules which will set forth the deadline for filing a proof of claim.  If you are not listed as a creditor and do not receive the notice, but are aware of the bankruptcy, you can find out the deadline from looking at the Court docket.

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If you are not listed, your claim is not properly listed, or your claim is listed as contingent, unliquidated, or disputed, you MUST file a proof of claim in order to have your claim accurately allowed in the Chapter 11 case.

DO NOT miss the deadline to file a proof of claim!  There are very few acceptable excuses for late-filed claims and more likely than not, your late-filed claim will be DISALLOWED.

Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP.  Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation.  You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

 

In my May 26th post, I raised several questions that unsecured creditors in any Chapter 11 case should know the answers to and take action where appropriate.  In my June 2nd post, I addressed the first question on “first-day motions”.

Let’s move on to the second question –  When is the “meeting of creditors” and should I attend?

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Section 341 of Title 11 of the U.S. Code, requires a creditors’ meeting – also referred to as “the 341 meeting” or “meeting of creditors,” which generally takes place within forty days after the bankruptcy is filed.

All creditors listed on a debtors schedule of debts are given notice of the meeting by the clerk of the bankruptcy court.  An assistant U.S. Trustee or attorney from the U.S. Trustee’s office generally presides over the recorded meeting where a representative of the corporate debtor appears and answers questions under oath.

Creditors are not required to attend, but may want to attend as the meeting is a chance for the creditor to get a preliminary idea of:

  • the debtor’s financial situation
  • whether the debtor has good prospects for reorganizing
  • what the debtor’s plan of reorganization might look like, and
  • the likelihood of the creditor’s claim being paid.

The Assistant U.S. Trustee or attorney will questions about the debtor’s financial history, reason for filing bankruptcy, plans for reorganization and generally go through the Chapter 11 filings to insure all filings are complete, true and correct.  This is a good way to educate yourself about the case and decide how actively you want or need to participate going forward.

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Creditors are also permitted to ask questions at the meeting, but as a general rule, the opportunity to ask questions will be limited.  If the size of your claim warrants it and you wish to do a detailed examination of the debtor about the case and/or your claim, you employ counsel to notice and take the debtor’s Rule 2004 examination – a deposition where you can inquire broadly into the debtor’s finances.

Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP.  Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation.  You can contact Heather at 561-804-4419 or hries@foxrothschild.com.