In an excellent decision for preference targets, the Eleventh Circuit recently held in the case of Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC) that the new value defense, under Section 547(c)(4), does not require new value to remain unpaid.

In reaching this conclusion, the 11th Circuit has found common ground with the Fourth, Fifth, Eighth, and Ninth Circuits which also reject the idea that § 547(c)(4) requires new value to remain unpaid.

This opinion should result in a meaningful reduction of preference exposure for vendors and others that continue to extend credit and transact business with financially troubled debtors.  In fact, vendors may be incentivized to continue extending short-term credit without fear of having all the payments they receive for newly delivered goods clawed back.

Yet another benefit (for practitioners) – complicated “remains unpaid” preference analysis spreadsheets will soon be distant memory (at least in the 11th Circuit).  Thank you 11th Circuit!


  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.

 

 

 

Debtors generally file a bankruptcy petition seeking a fresh start, free from their personal debts.  Debtors have the option to agree to pay certain debts to retain a car or other property through reaffirmation agreements and lease assumption.  Reaffirmation or lease assumption may seem like a good option at the time – when for instance a debtor wants to keep his current car.   However, whether he should enter into such an agreement should be given careful consideration as to the debtor’s ability to make payments going forward.  Once a pre-petition debt is reaffirmed or a lease is assumed, a debtor is bound to make the payments and if the debtor defaults, the debt is not included in the debtor’s fresh start – the coveted discharge.

By example, the debtor in a recent South Florida bankruptcy case,  entered into a assumption agreement for his leased vehicle.  At some point thereafter, the debtor determined that he could not continue to make the lease payments and turned the car over to the lessor.  Not wishing to be personally liable for the remainder of the payments under the lease, the debtor argued that he should not have any personal liability under the lease because he did not reaffirm his obligations under the lease in accordance with subsection 524(c) and thus the personal liability will be discharged when he receives his discharge.  Alternatively, he argued that because he “rescinded assumption” prior to discharge, his personal liability under the lease should be discharged.

The bankruptcy court considered in its decision on the matter, whether the safeguards contained within 11 U.S.C. 524 must be satisfied when a debtor assumes a lease pursuant to subsection 365(p) in order for a debtor’s personal liability under the assumed lease to survive the debtor’s discharge.

The court held that in personam liability under an assumed lease is not dependent on adherence to the reaffirmation provisions of subsection 524(c) and that Toyota may proceed against the car and has the right, subject to the provisions of the lease and applicable non-bankruptcy law, to seek from the debtor any remaining amounts due under the lease.  However, the lessor could not proceed against the debtor until after the debtor received his discharge, or the lessor sought stay relief against the debtor.

Whether to assume a lease or reaffirm a debt in bankruptcy requires careful consideration!  Debtors should ask themselves – can I foresee having any trouble making the payments going forward?  If the answer is maybe – just say no to assumption and reaffirmation!


  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.

My November, December, and February posts, discussed details of homestead protection in Florida including requirements, benefits and pitfalls.  If you are married, another asset protection and estate planning tool available to you is Tenants by the Entirety (“TBE”) ownership.  In Florida, a married couple may own several types of property TBE, including, but not limited to, bank accounts, real property (including their homestead) and personal property.   In fact, Florida law presumes that property acquired by a married couple is TBE property if the “six unities” of TBE ownership are present.  The six unities required for TBE ownership are (1) unity of possession (joint ownership and control); (2) unity of interest (the interests in the account must be identical); (3) unity of title (the interests must have originated in the same instrument); (4) unity of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must be married at the time the property became titled in their joint names).

Under Florida law, the benefit of owning property TBE is that it is exempt from process to satisfy debts owed to individual creditors of either spouse.  This is because an interest in TBE property is not equivalent to one half of the equity in the property, but rather, an inseverable interest in the whole owned by both spouses.

However, TBE is not a perfect asset protection tool as it can be broken, severed, and/or create unwanted liability.

  •  TBE property is not exempt from process to satisfy joint debts of both spouses;
  •  TBE protection dissolves if one of the spouses passes away;
  •  TBE protection is broken by divorce; and
  •  TBE ownership of cars, boats and/or other recreational vehicles could result in liability for both spouses under the dangerous instrumentality doctrine.

TBE ownership is not right for everyone or every situation, but it is worth considering if it is available to you.


  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 August post, I discussed two cases.  In the Failla case, the Eleventh Circuit 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.”  Thereafter, the S.D. Bankruptcy Court held, in the Kurzban case, that “the Eleventh Circuit did not rule that a debtor’s decision to surrender lasted in perpetuity“.

As of October 1, 2018, a new statute which expands on the spirit of both the Failla and Kurzban cases will apply to all foreclosure cases filed on or after October 1, 2018.  Specifically, Senate Bill No. 220 was signed into law by Florida Governor Rick Scott this month and will become effective as Section 702.12, Florida Statutes.

Section 702.12 will streamline the foreclosure process for mortgage lenders where bankrupt borrowers have filed an intention to surrender the lender’s property, not withdrawn that intention, and the Bankruptcy Court has entered a final order either granting the bankruptcy debtor(s) a discharge, or confirming a repayment plan that provides for surrender of the property.  If these circumstances are present, the statute provides mortgage lenders with a rebuttable presumption that the borrower has waived any defenses to foreclosure.  The statute further provides that the court shall take judicial notice of Bankruptcy Court orders upon the request of lender.

While Section 702.12 is a positive new law for mortgage lenders, the advice in my August post, still applies – Do NOT sit on your rights!   Section 702.12(3), similar to the ruling in Kurzban, provides that the borrower is not precluded from raising a defense based on the mortgage lender’s action or inaction subsequent to the filing of the bankruptcy document which evidenced the borrower’s intention to surrender the mortgaged property to the mortgage lender.


  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 November post, I discussed the basics regarding protection of your Florida Homestead from forced sale by creditors and alluded to exceptions to the rule.  Let’s discuss some of those exceptions as it relates to a bankruptcy filing.

If you have acquired an ownership interest in your Florida Homestead within 1,215 of the date you file for bankruptcy, your exemption is subject to a homestead exemption cap under section 522(p) of Title 11 (the “Bankruptcy Code”).  If you bought a house for the first time within the 1,215 day period, your Florida Homestead exemption is limited the amount of $160,375.00 for single debtors and $320,750.00 for married Debtors.  If you bought a new residence within the 1,215 day period, you may add any equity transferred to the previous residence to the exemption limit.  For instance, if you are a single Debtor, sold your home, and used $100,000.00 of equity from your old home to buy your new one, your allowed exemption would be $260,375.00.  As you can see, if you have more than the exemption limit in your Florida Homestead, it is important to consider and calculate the length of time you have owned your home before contemplating a bankruptcy filing.  In addition, if you have been chased by one or more creditora for several years prior to contemplating bankruptcy, you should consider what, if any, funds you have used to purchase the property, prepay your mortgage or improve the property.  Creditors may look to 522(o) of the Bankruptcy Code to attempt to recover those funds based on your intent to hinder, delay or defraud them.

Another risk to your Florida Homestead exemption is the dreaded “Ponzi Scheme”.  In a June, 2017 decision from the Middle District of Florida Bankruptcy Court, the Court awarded an equitable lien and constructive trust on the homestead of a Ponzi scheme investor’s Florida Homestead.  The Ponzi scheme investor, who had filed for bankruptcy and was not involved in or aware of the fraud, “passively received the fraudulent transfers” which he used to purchased the Florida Homestead.  The Court held that the Ponzi scheme investor’s lack of participation in the fraud was not determinative; the focus must be on the fraudulent nature of the funds and unjust enrichment.  The Ponzi scheme investor had been unjustly enriched by the receipt of the fraudulent transfers that he and his wife invested in their home.  Accordingly, the Court determined that an equitable lien and constructive trust should be imposed on the Florida Homestead to the extent the Ponzi scheme distributions were traceable into the Florida Homestead.   The take away – be wary of investment schemes (if it is too good to be true, it probably is) and be thoughtful about the source of funds you invest in your homestead.


  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.

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.

 

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.

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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.

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.