Americans generally cherish their right to a jury trial under the Sixth and Seventh Amendments to the United States Constitution and the media certainly perpetuate the idea that jury trials are the norm.  However, there are instances where a party may prefer that a judge, rather than a jury, decide the dispute(s) between the parties.

In a recent bankruptcy adversary proceeding out of the S.D. of Florida, the defendant moved to strike the Chapter 7 bankruptcy trustee‘s jury trial demand related to the trustee’s fraudulent transfer claims.  Defendant raised three arguments: (1) the trustee is bound by a contractual waiver of jury trial rights entered into by the debtor prior to the filing of its bankruptcy petition; (2) a trustee in bankruptcy is never entitled to a jury trial in connection with a fraudulent transfer or other avoidance action under the Bankruptcy Code; and (3) the present adversary proceeding is “integral to the claims resolution process,” thus equitable in nature, and so there is no right to jury trial.

The Court determined that none of the arguments had merit and the Trustee was in fact entitled to a jury trial, in a nutshell, as follows:

(1) Even if the debtor was bound by a jury trial waiver, that agreement is binding on the bankruptcy estate only with regard to those claims owned by the estate that were previously held by the debtor.  The bankruptcy estate’s claims derived from the Bankruptcy Code itself, such as fraudulent transfer claims, are not covered by the debtor’s pre-petition jury trial waiver.

(2) Fraudulent transfer claims seeking monetary recovery are actions at law and are subject to jury trial on the timely request of a party pursuant to Granfinanciera v. Nordberg, 493 U.S. 33 (1989).

(3) The defendant did not file a proof of claim and therefore, the trustee’s fraudulent transfer action was not part of the claims allowance process.

The Court noted that when a defendant files a proof of claim, an avoidance action becomes part of the claims process as a result and neither the creditor or the bankruptcy estate has a right to a trial by jury citing to Langenkamp v. Culp, 498 U.S. 42 (1990) and Katchen v. Landy, 382 U.S. 323 (1966).  However, the defendant had not filed a claim because it apparently did not have a claim against the estate.

The Takeaway:  If you have a claim against the bankruptcy estate and do not wish to have a jury trial on any avoidance claims you suspect will be filed against you, you may want to file a proof of claim.


  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.

46059778 - letters flying into mail box

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.”

46795384 - shock.

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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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.

 

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.

37035389 - vip abstract quilted background, diamonds and golden letters with crown.

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 Eleventh Circuit’s opinions in In re McNeal1, Bank of America v. Caulkett2 and Bank of America v. Toledo-Cardona3 put second mortgages in greater jeopardy for lenders when the Eleventh Circuit held that second-priority mortgage liens could be eliminated completely (i.e. “stripped off”) in chapter 7 bankruptcy cases where collateral is worth less than the amount of the first mortgage. On appeal of the Caulkett and Toledo-Cardona cases, the amici argued that affirmance of those decisions (http://business-finance-restructuring.weil.com/wp-content/uploads/2015/02/LSTA-Brief.pdf) could “ripple through the commercial loan market, impact the holders of junior liens, and dampen their appetite to lend on a junior basis.”

However, the Supreme Court’s ruling on June 1, 2015 in Bank of America, N.A. v. Caulkett, 135 S.Ct. 1995 (2015) (http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf), which will benefit lenders, declined to allow the two chapter 7 debtors, Caulkett and Toledo-Cardona, to rid themselves of second mortgages on their homes despite the fact that the first mortgages exceeded their home’s current value.  Specifically, the Supreme Court held that debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under 11 U.S.C. § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under 11 U.S.C. § 502.  For now, this decision provides a measure of relief for real estate lenders, avoiding the disorder and chaos real estate markets might have suffered if the Eleventh Circuit decisions had been affirmed and second-lien holders had little, if any, recourse on loans with severely diminished equity positions. For now the message is clear, Stop Stripping!…junior liens in chapter 7.

 

1477 Fed.Appx. 562, 2012 WL 1649853, at *1 (11th Cir. May 11, 2012)

2566 Fed.Appx. 897, (11th Cir. 2014)

3556 Fed.Appx. 911, (11th Cir. 2014)