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Written by: Robert DeMarco
Fifth Circuit Clarifies Position on Artificial Impairment of Classes
The Fifth Circuit Court of Appeals recently clarified its position on class treatment in a single asset real estate bankruptcy case [In re Village at Camp Bowie I, L.P., 710 F.3d 239 (5th Cir. 2013)]. Village at Camp Bowie I, L.P. [“VCB”], filed for relief under chapter 11 of the Bankruptcy Code on August 10, 2010; the day before a scheduled foreclosure sale. As of the petition date, VCB owed approximately $32 million to Western Real Estate Equities, LLC [“Western”] secured by real property located in west Fort Worth, Texas [the “Property”] and less than $60,000.00 to various unsecured trade creditors.
Western filed a motion for relief from stay on August 10, 2010, which motion the Bankruptcy Court took under advisement, but did not lift the stay as there was significant equity in the Property. The Debtor eventually filed its plan of reorganization on November 29, 2010. Subsequently, a second amended plan was filed, which plan designated only two voting, impaired classes, one consisting of Western’s secured claim and the other consisting of the unsecured trade claims.
The second amended plan tendered Western a secured note in the amount of its secured claim with interest accruing at 5.84% per annum with a balloon payment due in five years. The unsecured creditors were to be paid in full over three months from the effective date of the plan
Western objected to confirmation on the basis of artificial impairment [11 U.S.C. § 1129(a)(10)]. Western argued that the class of unsecured trade creditors were artificially impaired as the impairment was minimal –roughly $900.00 in foregone interest over a three month period. Alternatively, Western contends the plan was not filed in good faith [11 U.S.C. § 1129(a)(3)].
The Fifth Circuit acknowledged a split between the Eighth and Ninth Circuits regarding the question of whether § 1129(a)(10) distinguishes between artificial and economically driven impairment. The Court expressly rejected the Eight Circuit’s position and joined with the Ninth Circuit in holding that § 1129(a)(10) does not distinguish between discretionary and economically driven impairment. Judge Higginbotham, writing for the Court explained that the Eighth Circuit’s treatment of the issue was inconsistent with § 1123(b)(1) “which provides that a plan proponent “may impair or leave unimpaired any class of claims,” and does not contain any indication that impairment must be driven by economic motives.” In re Village at Camp Bowie I, L.P., 710 F.3d 239, 245 (5th Cir. 2013). Judge Higginbotham was critical of the Eighth Circuit’s conclusion that condoning artificial would reduce § 1129(a)(10) to a nullity, stating that “this logic sets the cart before the horse, resting on the unsupported assumption that Congress intended § 1129(a)(10) to implicitly mandate a materiality requirement and motive inquiry [and] ignores the determinative role § 1129(a)(10) plays in the typical single-asset bankruptcy, in which the debtor has negative equity and the secured creditor receives a deficiency claim that allows it to control the vote of the unsecured class.” Id. at 246.
Western, however, contended that statutory construction was not the real issue directing the Court to its decision in Matter of Greystone III, Joint Venture, 995 F.2d 1274 (5th Cir. 1991). The Fifth Circuit, in Greystone, held that a plan proponent cannot gerrymander creditor classes solely for purposes of obtaining the impaired accepting class necessary to satisfy § 1129(a)(10). The Court countered explaining that Western ignores the fact that the anti-gerrymandering principle resolved an ambiguity in § 1122 and was not a broad statement intended to “ride roughshod over affirmative language in the Bankruptcy Code to enforce some Platonic ideal of a fair voting process.” Camp Bowie, 710 F.3d at 247. “A plan proponent’s motives and methods for achieving compliance with the voting requirement of § 1129(a)(10) must be scrutinized, if at all, under the rubric of § 1129(a)(3), which imposes on a plan proponent a duty to propose its plan “in good faith and not by any means forbidden by law.” Id. (citations omitted).
The Court concluded that the second amended plan was proposed with the legitimate and honest purpose of reorganizing and had a reasonable chance of success. As such, the plan was proposed in good faith.
This recent opinion further emphasizes the importance that valuation can play in bankruptcy. This is especially so in the case of a single asset real estate case.
Lastly, while this case does present certain challenges to secured lenders in the single asset real estate case scenario, such secured lenders are not without recourse. A lender might consider: (a) purchasing the unsecured trade debt so as to control the unsecured creditor class; or (b) propose a competing plan that pays unsecured creditors in full on the effective date, so as to leave that class unimpaired.
DATED: June 25, 2013
Bringing you the most up-to-date news, tips and blogs throughout the web. Here’s your Bankruptcy Update for June 25, 2013 Sly Stone Wants Ex-Manager’s Bankruptcies Tossed Wind firm sued by state of Minnesota files Chapter 7 bankruptcy Detroit bankruptcy could force museums to auction off cultural treasures to help pay city debt
Kelly Rutherford filed for bankruptcy protection after dealing with financial struggles stemming from her child custody case against her ex-husband Daniel Giersch. Rutherford claims she is unable to pay her bills, while paying close to $2 million in legal fees in connection with the custody battle involving the couple’s two young children. Documents related to [...]
This is part of our series on How To File Bankruptcy. 
Though student loans aren’t dischargeable in a bankruptcy case unless you take extra steps, that doesn’t affect how you list them.
The bankruptcy lawyer knew the basic rule – a student loan can’t be discharged in a bankruptcy case without a separate judicial determination of undue hardship.
Looking at his client’s federal student loan debt, he listed them alongside the tax debts as priority claims.
Sitting in a downtown Los Angeles meeting of creditors room, the lawyer was confused when he was told to move the student loan debts elsewhere.
Just goes to show that even a lawyer who prides himself on being a seasoned bankruptcy can miss the boat once in awhile.
Student Loans Are Not Special
In bankruptcy, student loans aren’t given any special priority over other debts.
Federal of private, it doesn’t matter – they get paid after priority claims such as tax debts and child support arrears.
Just because the debt isn’t going to be discharged, it doesn’t necessarily mean the student loan will be paid before a credit card debt.
As such, the student loan gets listed with the general unsecured non-priority debts on your bankruptcy schedules.
Student Loans Are Tallied Separately
When you file for bankruptcy, your student loans are tallied separately for statistical purposes.
That means you’ve got to add them up on their own and account for them on the statistical summary.
Lawyers have software that does this automatically, by the way. It frees me up to think about bigger problems than whether I’ve added numbers correctly.
Don’t Freak Out Over Errors
The bankruptcy laws require you to list every debt – period.
Here, the bankruptcy lawyer made a slight error in not listing the student loan debt properly. But it was listed.
He listened to the trustee at the meeting of creditors, amended the schedules, and was done with the problem.
He’s not the first bankruptcy lawyer in Los Angeles to fumble a bit, and he won’t be the last. The key is to recognize the error and take immediate steps to correct it.
How To File Bankruptcy: Listing Student Loans On Bankruptcy Schedules was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Filing for bankruptcy can help you eliminate or regain control of your financial obligations. Keep in mind, it may not be the only option for you to consider, but many see it as a last resort when they have done other actions to try and resolve financial issues. Bankruptcy experts and credit counselors even suggest [...]
Last week, I was reminded about the importance of taking care of Chapter 13 business early. I got stuck in court for 4 hours waiting to have a 45 second conversation with the Chapter 13 trustee.My case involved a trustee motion to dismiss. My client had filed Chapter 13 about 2 years ago and earlier this year he lost his job and thus fell behind on his trustee payments. The trustee filed a motion to dismiss, with a hearing scheduled for mid-May. A couple of days before the hearing my client called to say that he had landed a new job and could I buy him some time. I called and emailed the trustee and she agreed to reset the motion to dismiss hearing to last week’s calendar.I notified my client of the reset and asked him for detailed information about his new job including a salary breakdown. He provided me most of what I needed but did not yet have an actual paycheck. He also sent the trustee 3 of the 5 missing payments. Finally, the weekend before the hearing I decided to file my amended budget with an estimated budget.On the Monday before the Wednesday hearing I started calling and emailing the trustee. No response. I checked the trustee’s web site – my client’s personal check had not yet posted (although he did have a registered mail receipt signed by someone in the trustee’s office). The day before the hearing I emailed and called. No response.Having no other choice, I trekked down to court only to discover that the judge’s hearing calendar was 15o pages with hundreds and hundreds of cases. It took 3 1/2 hours to read the calendar. After the call of the calendar I was able to talk to the trustee and she agreed to a consent order assuming the funds posted within 10 days – a 45 second conversation.
What could my client and I have done differently?
- I should have insisted on a paycheck breakdown 10 days earlier, even if we were working with estimates. My client wanted to be accurate but in this case timeliness was more important.
- My client should have brought the trustee certified funds by personal delivery and obtained a receipt for same. This should have been done at least 7 days prior to the hearing.
The good news here is that we saved his case. This is especially important because I had filed a lien strip early on in the case and eliminated a $30,000+ second mortgage. If the case had been dismissed that 2nd mortgage would have reattached to my client’s house.The post Objection to Chapter 13 Confirmation or Motion to Dismiss? Now the Hard Word Starts appeared first on theBKBlog.
On June 27, 2013, Managing Attorney Chris Jones was a featured speaker at a Consumer Bankruptcy Association presentation in Royal Oak, Michigan. He instructed both consumer and creditor bankruptcy attorneys about the changes made to the district’s model Chapter 13 plan effective January 2013. He covered such topics as handling debtors’ income tax refunds and whether [...]The post Attorney Chris Jones Speaks at Detroit Consumer Bankruptcy Association Event as Authority on New Model Chapter 13 Plan appeared first on Acclaim Legal Services, PLLC.
Written by: Robert DeMarco
Kelly Rutherford [“Rutherford”], one of the stars in The CW comedy Gossip Girls, has filed for chapter 7 bankruptcy relief in the United States Bankruptcy Court, Central District of California; Bankruptcy Case No. 13-23196-BB. The bankruptcy case was filed on May 20, 2013, and is the result of a tumultuous custody battle with her former husband, Daniel Griesch [“Griesch”], currently a resident of Monaco.
Rutherford’s bankruptcy schedules reflect she has very little other than a checking account ($11,441.00) and some clothing and household goods ($10,000.00). The actress has no real property and apparently, does not even own a car. That being said, she did manage to earn almost $500,000.00 per year for the last couple of years, from her production company, Ollie Bagollie Productions, Inc., as reflected on her statement of financial affairs. Her income during 2013 has been nominal, comparatively speaking, averaging approximately $14,000.00 per month with no income during the last few months.
Unfortunately, most of her income appears to have been expended on divorce lawyers and other family law experts in connection with a variety of custody and dissolution battles over the last 5 years (Rutherford commenced divorce proceedings in December, 2008, and was divorced from Griesch in July, 2010). Rutherford’s divorce counsel, Meyer, Olson, Lowy & Meyers, LLP, and others [ collectively, “MOLM et al”] recently filed a motion with the California Bankruptcy Court for effectively a “comfort order” wherein MOLM et al requested permission to continue their pursuit of legal fees and expenses due and owing them from their representation of Rutherford during the hotly contested custody fight. Court documents reveal that MOLM et al parties are owed approximately $1.8 million, collectively. Of that $1.8 million claim, it appears that Rutherford has paid approximately $600,000 of it, as her bankruptcy schedules list a remaining obligation due and owing to MOLM et al of $1.2 million. Oddly, Rutherford’s bankruptcy schedules fail to list any claim she may have against Giersch for reimbursement of the remaining fees and expenses.
The custody battle, is not, however, Rutherford’s only financial challenge. She owes the states of California and New York over $86,000.00 for income taxes and the Internal Revenue Service more than $270,000.00 for income tax. Further, she has managed to incur credit card debt in excess of $79,000.00.
If you are facing financial challenges stemming from a divorce, custody issues, or dissolution of property claims, bankruptcy may be a viable option, and the lawyers at DeMarco•Mitchell, PLLC, are here for you. Feel free to call or email us for a free initial consultation to discuss your financial condition and how we can help.
DATED: June 23, 2013
It's just another kick in the teeth. After losing homes in foreclosure a few years ago, borrowers may be getting another big surprise soon as mortgage lenders are now gearing up to file lawsuits against homeowners for the balance of the mortgage.
A Washington Post article this past weekend highlighted the rise in so-called mortgage "deficiency" court actions.
Many homeowners who were foreclosed upon don't know it, but most still owe money to the mortgage lender.
A foreclosure on a home works like this:
- The mortgage lender declares a "default" (breach of the contract) after payments are missed and "accelerate the mortgage" so that the WHOLE mortgage now becomes due and payable. (This is why a mortgage payment is often returned to the homeowner after several missed payments - the whole loan is due. One payment will not pay it off. The lender sends it back to avoid a legal defense from the homeowner that by accepting the payment the lender was reinstituting the loan.)
- The foreclosure auction is advertised in the newspaper for a specific date and time. In "non-judicial foreclosure" states -- which is the case for DC, Maryland and Virginia -- there is no actual court involvement in the process. (In Maryland, a foreclosure case is "docketed" in the county court, but there is no actual suit where the lender has to prove his right to foreclose.)
- At the auction, investors can, and sometimes bid, but usually it's the mortgage lender itself that bids a part - but only a part -- of its loan. For example, on a house with a $400,000 loan outstanding, and worth only $300,000, the lender may bid only $250,000 of its loan to win the auction. The balance of the loan - $150,000 in this example - is what is known in legal terminology as the "deficiency." The lender can re-sell the house at a profit, but that is solely the lender's to keep.
Most of the states in the US, including MD, VA and DC permit the mortgage lender to sue the borrower to get a judgment from a court for that deficiency.
And once the lender has a judgment, it can proceed to forcibly enforce that judgment through a variety of means it chooses including seizing the borrower's bank accounts, placing a lien on the borrower's property and/or requiring an employer to deduct from the borrower's paycheck and send it to the judgment creditor (known as garnishment). In this area, the judgment creditor is permitted to take up to 25% of the debtor's take-home pay.
It's a worrisome state of affairs, for borrowers who thought they were out of the woods after the foreclosure and after years of no communication from the bank.
During the past few years second mortgage lenders had been pretty aggressive and could almost be counted on to pursue borrowers after a foreclosure (since in most foreclosures it's conducted by the first mortgage holder and leaves the second mortgage holder with nothing).
But, until recently, the first mortgage holders had NOT been pursuing borrowers. Most of us lawyers who specialize in debt and foreclosure issues assumed they would NEVER sue for deficiencies. It may not turn out that way. In Maryland, according to the article, in 2006 there were deficiency lawsuits involving 19 homes that resulted in a total of $432,115 in judgments. Last year, in 2012, there were similar lawsuit involving 120 properties demanding $13.6 million.
So, how do you know if you owe? And what steps can you take to protect yourself? We'll discuss that in the next blog post here.
But if you're in a hurry, call our law office for an appointment. We specialize in legal representation of individuals and small business with financial distress issues in DC, Virginia and Maryland.
It's just another kick in the teeth. After losing homes in foreclosure a few years ago, borrowers may be getting another big surprise soon as mortgage lenders are now gearing up to file lawsuits against homeowners for the balance of the mortgage.
A Washington Post article this past weekend highlighted the rise in so-called mortgage "deficiency" court actions.
Many homeowners who were foreclosed upon don't know it, but most still owe money to the mortgage lender.
A foreclosure on a home works like this:
- The mortgage lender declares a "default" (breach of the contract) after payments are missed and "accelerate the mortgage" so that the WHOLE mortgage now becomes due and payable. (This is why a mortgage payment is often returned to the homeowner after several missed payments - the whole loan is due. One payment will not pay it off. The lender sends it back to avoid a legal defense from the homeowner that by accepting the payment the lender was reinstituting the loan.)
- The foreclosure auction is advertised in the newspaper for a specific date and time. In "non-judicial foreclosure" states -- which is the case for DC, Maryland and Virginia -- there is no actual court involvement in the process. (In Maryland, a foreclosure case is "docketed" in the county court, but there is no actual suit where the lender has to prove his right to foreclose.)
- At the auction, investors can, and sometimes bid, but usually it's the mortgage lender itself that bids a part - but only a part -- of its loan. For example, on a house with a $400,000 loan outstanding, and worth only $300,000, the lender may bid only $250,000 of its loan to win the auction. The balance of the loan - $150,000 in this example - is what is known in legal terminology as the "deficiency." The lender can re-sell the house at a profit, but that is solely the lender's to keep.
Most of the states in the US, including MD, VA and DC permit the mortgage lender to sue the borrower to get a judgment from a court for that deficiency.
And once the lender has a judgment, it can proceed to forcibly enforce that judgment through a variety of means it chooses including seizing the borrower's bank accounts, placing a lien on the borrower's property and/or requiring an employer to deduct from the borrower's paycheck and send it to the judgment creditor (known as garnishment). In this area, the judgment creditor is permitted to take up to 25% of the debtor's take-home pay.
It's a worrisome state of affairs, for borrowers who thought they were out of the woods after the foreclosure and after years of no communication from the bank.
During the past few years second mortgage lenders had been pretty aggressive and could almost be counted on to pursue borrowers after a foreclosure (since in most foreclosures it's conducted by the first mortgage holder and leaves the second mortgage holder with nothing).
But, until recently, the first mortgage holders had NOT been pursuing borrowers. Most of us lawyers who specialize in debt and foreclosure issues assumed they would NEVER sue for deficiencies. It may not turn out that way. In Maryland, according to the article, in 2006 there were deficiency lawsuits involving 19 homes that resulted in a total of $432,115 in judgments. Last year, in 2012, there were similar lawsuit involving 120 properties demanding $13.6 million.
So, how do you know if you owe? And what steps can you take to protect yourself? We'll discuss that in the next blog post here.
But if you're in a hurry, call our law office for an appointment. We specialize in legal representation of individuals and small business with financial distress issues in DC, Virginia and Maryland.
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