Blogs

Written by: Robert DeMarco
– Lowes to Buy Over 60 Store Locations
Orchard Supply Hardware Stores Corporation [“Orchard”], a neighborhood hardware and supply store with locations in California and Oregon, has filed for chapter 11 bankruptcy protection.  The San Jose based company said that Lowe’s Companies, Inc. [“Lowes”], will acquire the majority of its assets for $205 million in cash, plus the assumption of payables owed to nearly all of Orchard’s supplier partners. The chapter 11 bankruptcy petition was filed in order to facilitate the sale and restructure its balance sheet.  Orchard filed the bankruptcy case in the United States Bankruptcy Court for the District of Delaware; Bankruptcy Case No. 13-11565-CSS.  During the fiscal period immediately preceding the commencement of the bankruptcy case, Orchard generated revenue of $657 million.
The asset purchase agreement [“Agreement”] between Orchard and Lowe’s constitutes the initial stalking horse bid under the terms of a proposed Section 363 sale.  Under the terms of the Agreement, Lowe’s will acquire at least 60 of Orchard’s 91 stores. Orchard expects the sale process to be concluded in approximately 90 days, pending receipt of the necessary approvals from regulators and the Bankruptcy Court.  Orchard plans on liquidating any stores not acquired by the successful bidder.
Orchard, under the terms of the Agreement, will operate as a separate, standalone business, retaining its brand, management team and associates.  Robert A. Niblock, Chairman, President and CEO of Lowe’s, said in a June 17, 2013, press release, “Orchard’s neighborhood stores are a natural complement to Lowe’s strengths in big-box retail, offering smaller-format hardware and garden stores catering to the needs of local customers. Strategically, the acquisition will provide us with immediate access to Orchard’s high density, prime locations in attractive markets in California, where Lowe’s is currently underpenetrated, and will enable us to participate more fully in California’s economic recovery.
“Overall, Orchard’s business model offers great potential but it has been burdened with a high level of debt. With the debt addressed through the Chapter 11 process and appropriate support from Lowe’s, we believe that Orchard will be positioned for profitable growth as a standalone business within our portfolio,” added Mr. Niblock.
DATED:  June 21, 2013

Can a bankruptcy trustee search my house?  I don’t get that question every day, but it comes up.  The answer is yes, but it almost never happens.  The follow-up question, “do they need a search warrant?”  The answer is usually no.  Most people assume that you have to have a search warrant to search someone’s home.  However, the Fourth Amendment warrant requirement is much less stringent than most people assume.
The Fourth Amendment only applies to government actions.  A private citizen is not required to get a search warrant.  However, if a private citizen randomly searches your home that is a trespass, but more on that later.  A private citizen is only required to get a search warrant, if the government knew of and acquiesced to the search and was the search for a private purpose or a governmental purpose.
A chapter 7 trustee is a private party charged with overseeing the bankruptcy estate.  The chapter 7 trustee is not an employee of the government; and therefore, is not a government agent.  The fact that the chapter 7 trustee works closely with the government – the US Trustee’s Office – does not change this fact.  Additionally, and this where trespass comes into play, the chapter 7 trustee is the legal owner of the bankruptcy estate.  That means that the chapter 7 trustee can arguably enter a debtor’s residence to look for property of the estate without committing trespass, because the trustee is actually asserting their legally recognized ownership interest.
Another important angle is that bankruptcy is voluntary.  A debtor voluntarily submits themselves to the bankruptcy process for the purpose of obtaining a discharge of their debts.  This means that courts are more likely to find implied consent for a search.  Does this mean that a bankruptcy trustee can just walk into your house unannounced?  No.  However, it does mean that the chapter 7 trustee can require you to give them access to your property, they can bring a sheriff on civil standby, and if you refuse entry they can deny your discharge or get a court order allowing them to enter your property.
The last question is whether it is likely that the trustee is going to search your house.  The answer is that it is extremely unlikely.  The chapter 7 trustee have very little interest in the contents of your house, unless there is a good reason to believe that you 1) hid property from the trustee, or 2) that the property is significantly more valuable than you disclosed on the petition.
My advice is not to worry about the trustee searching your house.  All you need to do is make sure that your bankruptcy schedules are complete and accurate to the best of your knowledge, remember that you cannot leave property off of your schedules for any reason, and you will be fine.
The post The 4th Amendment and Bankruptcy appeared first on Bankruptcy Attorney Seattle and Kent.

The bankruptcy court has the power to surcharge a debtor’s exemptions.  What does this mean?  When an exemption is surcharged, the court takes the exemption away from the debtor; because the debtor committed a wrongful act that caused waste to the bankruptcy estate.  This is a controversial practice because there is nothing in the Bankruptcy Code that explicitly permits the court to do this.  Instead, the court relies on its equitable powers under 11 U.S.C. § 105.  Basically, 11 U.S.C. § 105 is a catch-all provision that gives the court power to do things that are for the benefit of the integrity of the bankruptcy system, but not actually defined anywhere in the Bankruptcy Code.  This is controversial for two reasons.
Surcharging Exemptions Harms Debtors
First, it is controversial because it can hurt debtors very badly.  Imagine that you have a house with $85,000 in equity.  The Washington State homestead exemption protects up to $125,000 in equity.  When you file bankruptcy, you justifiably believe that your house is safe.  Now let’s say that you get into a dispute with the trustee over some property.  You choose to litigate the dispute and lose.  The trustee collects the property, but that property is worthless to your creditors, because the trustee had to pay litigation expenses.  So what does the trustee do?  The trustee files a motion to surcharge your homestead exemption.
If the court grants the motion to surcharge your homestead exemption, then the trustee gets to sell your house; but you don’t get to apply your homestead exemption.  This means that you could be current on your mortgage, have equity that is 100% protected by the homestead exemption, and still lose your house; all because you decided to litigate.  That is exactly what happened in the case of Law v. Siegel that is going to be heard by the US Supreme Court in October, 2013.
Surcharging Exemptions Is Not Regulated By Statute
The second reason that surcharging exemptions is controversial is that it is not regulated by statute.  A bankruptcy court cannot surcharge your exemptions simply because you litigated with the trustee and lost.  The court has to find that you committed some kind of act of bad faith or an act that was intended to harm either the bankruptcy estate or the integrity of the bankruptcy process.  The problem is that there is no clear standard for how a court determines your exemptions should be surcharged or whether your actions damaged the integrity of the bankruptcy process.  See Lattman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004) (originally a Seattle bankruptcy case).
Basically, “integrity of the bankruptcy process” is defined by the bankruptcy judge using their equitable authority under 11 U.S.C. § 105.  This is problematic because exemptions are defined under 11 U.S.C. § 522.  That section states what exemptions are available and the limitations on those exemptions.  Significantly, there is no provision for surcharging exemptions in Section 522.  This is problematic for bankruptcy practitioners, because it can be difficult to predict when you are at risk for having your exemptions surcharged.
Conclusion
Exemptions are only very rarely surcharged.  It is not something that the average debtor needs to worry about.  However, exemption surcharging is a very serious matter when it occurs.  In some cases, it is obvious why an exemption was surcharged.  For example, a debtor hid property or committed bankruptcy fraud.  In other cases, it is less clear.  My concern is that an aggressive creditor will push the trustee to litigate; and that litigation will result in surcharged exemptions.  This is a big issue in bankruptcy law that has been unresolved for some time.  Hopefully, the US Supreme Court will shed some light on whether surcharging exemptions is permissible and under what circumstances.  The ideal solution would be for Congress to amend the Bankruptcy Code to explicitly provide for or prohibit exemption surcharging.
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Student loans continue to be a heavy burden on many people.  Student loan payments are often as much as mortgage payments and can severely limit your ability to have any kind of financial future.  Unfortunately many people just assume that they cannot discharge their student loans in bankruptcy.  While it is true that it is difficult to discharge student loans in bankruptcy, it is not impossible.  Some recent decisions from courts in the Ninth Circuit give us some indication how to discharge student loans in bankruptcy.
The clear indication from the most recent run of cases is that discharging student debt requires preparation.  Unless you are living on the verge of homelessness, you cannot simply file a bankruptcy petition, file an adversary proceeding, and expect to get a student loan discharge.
The Evolving Law of Student Loan Discharge
The three elements of student loan discharge are called the Brunner Test and can be boiled down to: 1) how much do you earn, 2) could you earn more, and 3) have you tried to do something about your student loans.
The first part of the test and the third part of the test go together, because they are related to earning earnings and attempts at repayment.  Basically, the court will look at how much you make and how you spend your money.  If too much money is left over, then you are not entitled to a student loan discharge.  One court said that you have to “show more than tight finances” but you can stop short of “utter hopelessness,” however, you are not entitled to a “middle class standard of living” if you want to discharge student debt.”  ECMC v. Beattie, 490 B.R. 581, 586 (W.D.WA 2013).
The question, therefore, is whether your expenses are excessive in light of your obligation to repay your student loans.  Fortunately, the Ninth Circuit’s recent decision in Hedlund v. Educational Resources Institute, Inc. will help many more people qualify for a student loan discharge.
First, and most importantly, they separated the conduct of the husband – who was seeking a student loan discharge – from the conduct of his wife.  The court ruled that the wife’s decision not to work could not count against the husband’s good faith in proposing a budget and attempting to repay the student loans.  This provides some relief for borrowers, because it prevents the lender from pointing at the spouse’s conduct.  This doesn’t mean that if your spouse is a plastic surgeon, you can simply ignore their income and discharge your student loans.  It does, however, mean that the court must focus on the borrower.  In the past, lenders would ask why the borrower’s spouse couldn’t earn more.
The idea that the inquiry is narrowed may not seem significant to non-lawyers, but to lawyers it is huge.  The Brunner Test is a “totality of the circumstances test.”  The court examines each of the three prongs of the Brunner Test independently, but it must look at every fact and circumstance that arises under each prong.  If you fail to meet one prong, then the court will rule in favor of the student lender.  Narrowing the inquiry means that there are fewer facts and circumstances that go into the test.  This means that there is less opportunity for a student lender to use something against you.  The facts and circumstances no longer include the question “why can’t your spouse earn more.”
The interesting thing about this is that your spouse’s lack of work cannot hurt you anymore, but it can still help you.  For example, if your spouse decides to stay at home and take care of the kids or an elderly relative that does not mean you are acting in bad faith and cannot discharge your student loans.  However, if your spouse is unable to work or unable to increase their income, that can still help you.  You can still argue that your ability to repay your student loans is limited by your spouse’s inability to increase their income.
Second, the Ninth Circuit recognized that even though certain expenses might be “excessive” they could also be “marginal.”  In other words, a budget does not have to be perfect and it does not have to be cut down to the barest minimum in order for you to discharge your student loans.  In Hedlund, the Ninth Circuit noted that the cell phones and the car lease were probably excessive expenses, but they were also marginal.
The court reached this conclusion in part because the expenses were also necessary.  This highlights an area of struggle in student loan litigation.  Student lenders will argue that any expense beyond basic housing, food, clothing, and medical expenses is excessive.  This means that student lenders will object to things like car payments, cable, and internet.  It is absolutely absurd to argue that the internet is not part of a basic existence in 2013, but that’s their argument.  The Hedlund decision will hopefully limit their ability to make such absurd arguments by allowing a court to note that an expense may be excessive, but that the excess is marginal.
The middle prong of the Brunner Test – could you earn more – is usually the simplest prong to prove.  You have to prove that you have tried to get a better paying job; and that, a better paying job is unavailable.  A trickier question is whether you could get a second job; however, courts appear to be wary of forcing people to work more than fulltime.  If you are only working part time, then the court will expect you to either work a second job or explain why you cannot work a second job.  Given the state of the economy, this remains the easiest part of the test to satisfy.
Why Preparation Is Essential
The recent cases on student loan discharge have all focused on the borrower’s attempts to repay the loan before they filed bankruptcy.  There are two reasons for this.  First, the law treats bankruptcy as an absolute last resort for student loan borrowers.  Second, in the last few years student lenders have created many new forbearance and alternative repayment options.
Since bankruptcy is the absolute last resort for discharging student debt, it is important to show that it is your last resort.  This means that before you file bankruptcy, you should work with a bankruptcy attorney to put your case in the best possible light.  This means reviewing your employment history, reviewing your spending, and documenting your efforts to maximize income and reduce expenses.  Documentation is your best friend when you file an adversary proceeding to discharge a student loan.  If you can actually show what you spent your money on for the last six months to a year, and it was only spent on necessities, then you have a much stronger case.  Additionally if you can show that you have actively tried to seek higher paying work and been unsuccessful, then you have a much stronger case.
At the same time that you are documenting your income and expenses, you should apply for all consolidation, forbearance, and alternative repayment plans that are available to you.  You will quickly realize that your federally backed student loans are much quicker to help you out than your private student loans.  That’s fine.  Although there is no definitive ruling on the subject, it appears that courts are willing to give debtor’s credit for acting in good faith if they work out alternative repayment plans on federal loans; and then, attempt to discharge private loans that are either unwilling to reach alternative payment plans or their alternative payments plans are unreasonable.
One note of caution about applying for forbearance or alternative repayment plans, beware of lenders who “lose” your application.  Avoid online applications, because they are often impossible to trace.  Whenever possible, mail in your application using registered mail and keep the mailing receipt.  If it is impossible to submit the application through the mail, then make sure that you print out any confirmation of filing and make sure to contact customer service for confirmation that they have received your application materials.  You should keep all correspondence.
Conclusion
It is possible to discharge student loans in bankruptcy, but you should not expect to do it overnight.  You should work with a bankruptcy attorney who can help you setup your case to get the best possible result.  You may be able to resolve your student loan problems without resorting to bankruptcy.  A bankruptcy attorney, who is experienced in student loan issues, can help you find non-bankruptcy options for your student loans.  If you cannot find non-bankruptcy options for your student loans, then your bankruptcy attorney can help you create the paper trail necessary to make a good case for student loan discharge.
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