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Preparing Yourself and Your Client for Chapter 11: Part I of II – The Petition Package, Filing the Case, Filing Fees, and First Days

July 18, 2016

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Editor’s Note: While we at The Bankruptcy Cave always enjoy writing about new cases or legal developments, we really love using our posts as an opportunity to pass along tips, easily forgotten rules, and things that make the client think you are a rock star (and avoid a client’s distrust in your ability to captain the Chapter 11 ship).  (For prior A++ Forms and Resources on taking depositions, see here; on preparing for a deposition, see here; and on preparing for and handling the no-show deposition, see here.)  Here is our latest, focusing on the petition package, filing the case, and first days.  Coming in a few weeks is a post on preparing the list of creditors, and the tips and traps of giving proper notice to creditors and avoiding foibles (or worse, accusations) relating to notice of the case and the 20 largest creditors.

As a Chapter 11 debtor’s attorney, the prospect of serving as debtor’s counsel is an exciting – and increasingly rare – opportunity. The preparation for filing a Chapter 11 case involves negotiating complex cash collateral and financing issues and drafting numerous first-day motions.  But as important as those strategic issues are, don’t forget to give due attention to the seemingly simpler issues, which can turn into time-consuming hurdles as the filing date quickly approaches.  The list below contains a few suggestions for filing-related items to work on well in advance, in hopes of minimizing time spent correcting procedural snafus or worse, jeopardizing the effectiveness of the petition itself.


  1. Preparation of the Petition Packages: It’s tempting to think of the petition as the simplest of documents to prepare for the Chapter 11 filing, and it probably is.  Still, the short petition is not the only document required for filing, and the information required in the larger petition package might take some extra searching.  For example, in the new petition forms, you’ll need to identify your client’s four-digit North American Industry Classification System (“NAICS”) code.  If your client has not used a NAICS code before, they will need to identify the code that best describes their business.  The client will also need to provide, pursuant to Fed. R. Bankr. P. 1007, a list of all holders of equity security interests in each debtor, which may require research by the client.  Other items required in the petition packages are the list of the top 20 creditors (tips on the preparation of that coming in our next post) and the board resolutions authorizing the filing, which might be subject to last-minute changes as the filing date crystallizes.


  1. Corporate Authorization: Make sure you actually read the articles of incorporation, by-laws, LLC agreement, and any other organic documents for each and every putative debtor to determine what procedures you must follow to obtain authorization for the filing.  (And make sure you have the most recent copies of each – amendments to these documents tend to be forgotten or hard to find, especially by a floundering debtor.)  Things on which you must focus:


  • Is an actual meeting of the board (or other governing body) needed?  Can that be waived?


  • Are a certain number of days’ notice required for any meeting or any consent?  And can that notice be waived?


  • What are the quorum rules?


  • Are any directors (or other governing parties) going to be on vacation, or indisposed on or around your projected filing time?  If so, what can you do now to work around that?

 Think hard about these issues a few weeks before any potential filing – looking into this a few days before filing is not a suggested practice. 

  1. Order of Filing Multiple Petitions: Venue must be proper for the initial debtor under 28 U.S.C. § 1408(1).[1]  For all subsequent debtors, you can rely on the “affiliate” venue rules of 28 U.S.C. § 1408(2).[2] But even for the subsequent debtors, make sure they are filed in the correct order – don’t make the second case be one for a “cousin” of the initial debtor that, while it may be in the same corporate family, does not qualify as an “affiliate” under the Bankruptcy Code’s definition. 
  2. Alerting the Court: In some jurisdictions, like Delaware, the local rules require at least two days’ notice to the court of an imminent Chapter 11 filing.  If the rules are silent, consider discreetly alerting the court clerk of the impending case, especially if the district in which you’re filing is does not frequently see Chapter 11 cases.  A conversation with the clerk will provide an opportunity to ask for the court’s preferences on certain mechanics of docketing the petition and first-day motions.  For example, certain first-day motions, like motions to use cash collateral or motions to provide adequate assurance to utilities, might have their own ECF event, whereas others are generic motions.  The clerk might also have advice on how to link multiple debtor cases together so that they receive the same judge assignment.


  1. Filing Fees: This one is really important, and easily forgotten until it is too late.


  • If you have multiple debtors, consider whether the payment of the filing fee will be an issue.  The filing fee is currently $1,717 for each debtor; if you’re using a single credit card, it could take fewer than ten debtors to hit a credit card limit.


  • Likewise, make sure you ask the debtor a few weeks in advance for an additional deposit to cover the filing fees.  Just before filing, the prospective debtor may have little or no access to cash – the day before filing is not a good day to call the client and say “I need $17,000 wired to me immediately for the filing fees for the ten affiliated debtors.”  And if you don’t get paid for this in advance, you eat it, since your firm can’t be retained as a disinterred professional, if your firm is a creditor by virtue of having advanced the filing fees.


  1. Don’t Get Off on the Wrong Foot with the U.S. Trustee: You should also provide drafts of the petition and first-day motions to the Office of the United States Trustee with as much notice as possible, which will be difficult because those motions are usually undergoing continuous revision in the days leading up to the filing.  Providing notice to the U.S. Trustee right when you file is not ideal – give the U.S. Trustee a day or two’s notice, to engender goodwill and avoid a flustered U.S. Trustee.


  1. Identifying Local Precedents: As with any motion, in preparing first-day motions, you will cite to precedents authorizing relief similar to the relief sought in your motion.  However, first-day operational motions are not often the subject of appellate decisions, and a more effective source of authority is previous local debtor cases.  Searching for those orders on PACER is time-consuming and requires historical knowledge of cases filed in your district, so be prepared to spend more time than usual on this element of the drafting.  And plan ahead, even months or years ahead – if you are in a jurisdiction that rarely sees complex Chapter 11s, when one is filed, go ahead and set up a special Outlook folder to contain key pleadings that you may use in the future, as precedent or forms.  Spending 20 minutes now, when you see some handy precedent from a local Chapter 11 – can save dozens of hours in the future.


  1. Expected Additional Filings: Jurisdictions can vary in the particular pleadings the court expects to see filed with the petition. For example, some courts require employment applications immediately.  Other jurisdictions require a motion for expedited relief for any motion to be heard in the initial days of the case.  Apart from the motions you’ll file immediately based on your client’s urgent financial and operational needs, be sure to find out whether additional pleadings are expected, and what the local rules require for an immediate first day hearing.

[1]           That is, the district where the case is filed must be the debtor’s “domicile, residence, principal place of business in the United States, or principal assets in the United States . . . for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district.”


[2]           The affiliate venue rule allows a petition to be filed in the district “in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership.”


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Golf Channel Finds the Fairway in Fraudulent Transfer Litigation – Good News for Vendors in Ponzi Scheme Cases

May 9, 2016


In some good news for commercial vendors, the Supreme Court of Texas recently ruled that payments for ordinary services provided to an insolvent customer are not recoverable as fraudulent transfers, even if the customer turns out to be a “Ponzi scheme” instead of a legitimate business.

In Janvey v. Golf Channel, Inc.,[1] the Court considered whether, under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), a vendor should be required to return payments it received in good faith for services rendered simply because its customer turned out to be a Ponzi scheme and not a lawful business.[2]  Ultimately, the Court determined that the objective market value of services provided in the ordinary course of business serves as a defense to a fraudulent transfer claim, despite the illegitimate nature of the Ponzi scheme. In reaching that conclusion, the Court rejected the contention that the value provided must flow directly to the Ponzi scheme’s creditors.

A quick refresher on fraudulent transfers: The Uniform Fraudulent Transfer Act (and its bankruptcy counterpart, Section 548 of the Bankruptcy Code) prevents a debtor from improperly moving assets beyond the reach of creditors. As one example relevant to the Janvey case, an asset may be recovered for the benefit of creditors if the debtor transferred it “with actual intent to hinder, delay, or defraud” creditors, unless the transferee took the asset in good faith and for reasonably equivalent value. Factors indicating fraudulent intent include transfers to insiders, concealment of the transfer, or debtor-retained control of an asset after the transfer, all of which are questions of fact.

When a Ponzi scheme is involved, courts generally bypass analyzing such “badges of fraud” and conclusively presume that all transfers in furtherance of the scheme—even to legitimate creditors with no role in the fraud—are made with actual intent to defraud because the underlying business is inherently illegal and insolvent. In addition, the nature of the Ponzi scheme raises doubts about a vendor’s normal defense that it provided value, because the “value” the vendor provided does not necessarily improve the position of the scheme’s creditors – it actually unwittingly allows the illusion of the Ponzi scheme continue, keeping the scheme afloat to defraud other investors. Indeed, this was the position the United States Court of Appeals for the Fifth Circuit took in Janvey before vacating its initial opinion and certifying this state law question to the Supreme Court of Texas. 780 F.3d at 647.

In Janvey, The Golf Channel (“TGC”) had a media-advertising services contract with Stanford International Bank Limited (“Stanford”), receiving $5.9 million for its advertising services. When Stanford became exposed as running a Ponzi scheme, a court-appointed receiver sued TGC to recover the transfers as fraudulent, asserting that the $5.9 million TGC had received did nothing to benefit Stanford’s defrauded investors or creditors, even though the same services would be valuable to a legitimate business. The receiver contended that, under the statute, the meaning of “value” should be measured only by the actual utility of the services to the creditors, categorically rejecting the market value of the services as a relevant consideration. The Fifth Circuit initially agreed with the receiver (in a decision that shocked many), then vacated its opinion and asked the Supreme Court of Texas to interpret applicable Texas law under TUFTA.

Luckily for TGC and all other good-faith commercial vendors, the Supreme Court of Texas did not adopt the receiver’s position. Instead, the Court determined that incidental involvement in a Ponzi scheme is insufficient to negate the objective value of services provided, holding that a showing of “reasonably equivalent value” sufficient to defend the fraudulent transfer claim can be satisfied with evidence that the transferee (i) fully performed under a lawful, arm’s-length contract for fair market value, (ii) provided consideration that had objective value at the time of the transaction, and (iii) made the exchange in the ordinary course of the transferee’s business. The Court opined that an objective inquiry that considers the existence of “value” from a reasonable creditor’s perspective at the time of the transaction is consistent with the statutory language and strikes an appropriate balance between protecting creditors and protecting vendors who have given reasonably equivalent value in good faith.  (BTW, for another post on protecting vendors from avoidance actions where the vendor is not the least bit at fault, read this post from our fellow Bankruptcy Cave bloggers, here.)

A contrary holding would have required vendors to determine not only each customer’s creditworthiness at the outset of a relationship, but to monitor the legitimacy of the customer’s business at all times – impossible for any vendor to do, especially with investment schemes that appear for years to be legitimate businesses. For now, as long as vendors meet the standards outlined about regarding the objective value they provide, they should be safe from fraudulent transfer claims – at least in Texas.

[1]    2016 WL 1268188 (Tex. April 1, 2016, Case No. 15-0489).

[2]    The Supreme Court of Texas undertook this analysis on a certified question from the United States Court of Appeals for the Fifth Circuit. See Janvey v. Golf Channel, Inc., 792 F.3d 539 (5th Cir. 2015). In certifying the question to the Supreme Court of Texas, the Fifth Circuit, en banc, vacated its earlier panel decision that would have required The Golf Channel to return the payments at issue. See Janvey v. Golf Channel, Inc., 780 F.3d 641 (5th Cir. 2015).

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Debtors Cannot Void Junior Liens on Underwater Property in Chapter 7

June 23, 2015


On June 1, 2015, the Supreme Court released its opinion in Bank of America, N.A. v. Caulkett, No. 13-1421, 575 U.S. ____ (2015), in which it held that a Chapter 7 debtor may not void a junior mortgage under Section 506(d) of the Bankruptcy Code merely because the debt owed on a senior mortgage exceeds the present value of the property and the creditor’s claim is secured by a lien and allowed under Section 502. For now, this opinion cuts off a Chapter 7 debtor’s ability to “strip off” an underwater junior lien.

In Caulkett, the debtor had two mortgage liens on his home; Bank of America held the junior lien. The amount owed on the senior mortgage exceeded the value of the home, rendering Bank of America’s junior mortgage fully “underwater,” or with no current economic value. Generally, where the value of a creditor’s interest in its collateral is zero, a creditor’s claim cannot be a “secured claim,” and the lien securing the junior mortgage can be voided in a Chapter 7 case.

The authority for this voiding procedure lies in Section 506 of the Bankruptcy Code. Under Section 506(a), “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” 11 U.S.C. § 506(a)(1). Under Section 506(d), “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 U.S.C. § 506(d). Based on this understanding of Section 506, the Caulkett debtor argued that Bank of America’s junior lien should be void.

But in a 1992 opinion, Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court adopted a different construction of the term “secured claim” that focused on two things: (1) the validity of the creditor’s perfected security interest in its collateral; i.e., Does the lender have a valid lien? and (2) whether the creditor’s claim was “allowed” under Section 502, which governs the allowance of claims in bankruptcy cases; i.e., did the lender file a proper claim in the bankruptcy case, and did anyone object? Notably, the Dewsnup construction of “secured claim” did not take into consideration the collateral’s value.

The Supreme Court in Caulkett explained that it was bound by the Dewsnup construction. Accordingly, the debtor could not void Bank of America’s junior mortgage because the mortgage was (1) secured by valid a lien and (2) supported by an allowed claim to which no party had objected.

In a footnote, which Justices Kennedy, Breyer, and Sotomayor declined to join, the Court acknowledged that “[f]rom its inception, Dewsnup . . . has been the target of criticism.” This is because it appears to be at odds with the plain language of Section 506. In addition, Dewsnup has generally not been applied to Chapter 13 cases, where the stripping off of underwater liens is common, and debtors can rely on other similar sections of the Bankruptcy Code.

On the other hand, preserving a junior lien is especially important during times of depressed real estate prices. Once a creditor’s lien has been stripped, upon the sale of the property—even where the value of the property has later appreciated—the junior mortgage creditor gets nothing, and the benefit goes to the debtor. Under Caulkett, the lender is not harmed by a temporary drop in real estate prices, as it may retain its lien even if the property appears to be completely underwater. Chapter 7 debtors like the one in Caulkett may argue that, under Dewsnup and now Caulkett, they are unduly burdened by a lender’s lien, and that the “fresh start” they hoped a bankruptcy case would afford them is diminished.

But the Court emphasized that it wasn’t asked to overrule Dewsnup, and the Court concluded that, under Dewsnup, a Chapter 7 debtor may not void a junior mortgage lien under Section 506(d) merely because the debt owed on a senior mortgage lien exceeds the value of the collateral. With the Court appearing to have left open the possibility of revisiting its Dewsnup decision, it is likely that this contentious issue will remain in play.

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U.S. Supreme Court: Inherited IRA Funds not “Retirement Funds”

September 29, 2014


On June 12, 2014, the Supreme Court issued a unanimous opinion in Clark v. Rameker, Dkt. No. 13-299, 573 U.S. ___ (2014), holding that funds held in inherited Individual Retirement Accounts are not “retirement funds” within the meaning of 11 U.S.C. § 522(b)(3)(c) and therefore not exempt from the bankruptcy estate. This opinion limits retirement funds that remain out of creditors’ reach when an individual files a bankruptcy case.

In Clark, Heidi Clark inherited a traditional IRA account established by her mother. Clark then filed a Chapter 7 bankruptcy case and claimed the inherited IRA account as exempt from the bankruptcy estate under Section 522(b)(3)(C). The trustee and unsecured creditors objected, arguing that the inherited IRA funds were not “retirement funds” within the meaning of the statute.

The Court distinguished between inherited IRAs and traditional IRAs, noting that holders of inherited IRAs are prohibited from making contributions to those accounts, setting them apart from traditional retirement accounts; that holders of inherited IRAs are required to withdraw money from such accounts, regardless of how many years they may be from retirement; and that holders of inherited IRAs may withdraw the entire balance of the account at any time and for any purpose, without penalty. Observing that the funds in an inherited IRA could be spent on even a “vacation home or a sports car,” the Court expressed concern that allowing an inherited IRA to be exempt from the bankruptcy estate would convert the Bankruptcy Code’s purposes of providing a “fresh start” into a “free pass.”

The Clark opinion resolves a split among Circuits. The Fifth Circuit ruled in In re Chilton, 674 F. 3d 486 (5th Cir. 2012) that inherited IRAs constituted retirement funds within the “plain meaning” of § 522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). The Seventh Circuit, in Clark, disagreed, emphasizing that the Bankruptcy Code should not be used to exempt from creditors’ reach funds that were freely accessible for current use by the debtor, without penalty.

Although Clark excludes inherited IRAs from exemption under Section 522(b)(3)(c), some states, including Missouri, provide a separate exemption for inherited IRAs under state law. The Clark decision is not likely to affect bankruptcy cases and practices in these states.

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