Bryan Cave Bankruptcy & Restructuring Blog

Main Content

BC Healthcare Restructuring Update: R CSR’s O-U-T? Less U.S. Gov’t $$ = More 11s . . . ?

Ok, if your attention span is anything like ours, all this wonky stuff about the ins and outs of the Affordable Care Act (or “ObamaCare,” as most of us know it) causes your eyes to glaze over and makes your mind wander to simpler topics, like who will win Dancing with the Stars, whether the Will & Grace reboot can make it, or how Luke may soon be revealed as the most evil Jedi of all.

But trust us, faithful reader, and you can, in about three short minutes, become a whiz on last week’s latest change to ObamaCare, which we think will lead to a lot more healthcare-related restructuring activity. So here is the 411 on last week’s termination of ObamaCare’s so-called “CSR Subsidies,” and its impact on our precarious, bankruptcy-prone, healthcare marketplace.  All presented to you in easy-to-follow FAQs!

What is a CSR Subsidy?

The federal government calls them “Cost-Sharing Reduction Subsidies.” In short, a key part of ObamaCare had the federal government give cash to insurers.  In turn, insurers used that money – the CSR Subsidy – to lower all ObamaCare premiums, and also reduce out-of-pockets and deductibles for low-income ObamaCare enrollees.

How much were these CSR Subsidies?

The CSR Subsidies cost the federal government about $7-$9 billion annually.

How much did the CSR Subsidies help?

A lot. The Kaiser Foundation – which has great coverage of this and other healthcare issues – estimates that the CSR Subsidies to insurance companies prevented certain rate hikes that would be borne by all ObamaCare enrollees.  Also, each low-income ObamaCare enrollee’s annual medical and prescription deductibles decreased by over $3,000 and annual out-of-pocket maximums were lowered by over $5,500. We’re not making this up, click here to see the Kaiser Foundation study for yourself.

So what will happen without the CSR Subsidies?

Actually, low-income ObamaCare enrollees are entitled to discounts from their insurers whether the federal government subsidizes / reimburses the insurers or not.  But that $7-$9 billion in lost government funding has to be made up somewhere – so insurers in the ObamaCare exchanges are expected to raise rates next year by 15-21% due to the loss of CSR Subsidies, according to the Kaiser Foundation study cited above.

But I thought Congress didn’t “Repeal or Replace” ObamaCare – So how did this change happen?

The CSR Subsidies were required under ObamaCare – but Congress never actually appropriated any money to make the CSR Subsidies to insurance companies.  The prior administration paid the insurers anyway, leading to a very weird lawsuit by Congress against President Obama.  Last week, President Trump simply decided to no longer send funding to insurance companies, and since the funding had never been appropriated by Congress, no congressional action was needed to end the federal government’s CSR Subsidies.

How does this relate to restructuring?

We’re lawyers, not economists. But even we can surmise that when the price of a good or service (here, ObamaCare) goes up 15-21% in one year, less people will buy it.  Indeed, our friends at The Motley Fool estimate that the loss of CSRs will result in 7 million more uninsured Americans.  So when folks said this was a real blow to ObamaCare, they weren’t kidding.

And of course, fewer patients with insurance means more unreimbursed care for hospitals and other healthcare providers. This precarious industry is getting ready for another terrific beating.  Sure enough, when news of the end of the CSR Subsidy program broke last Thursday night, October 12, the next day saw all major healthcare stocks – insurers, hospitals, ambulatory centers, even benefits administrators – take serious losses.  The strong ones will make it; as to the weak ones, get ready for more restructuring activity as more uninsured patients cause more losses.

So, is all lost when it comes to the CSR Subsidies?

People, Washington D.C. is a weird place.  Even as we were writing this Bankruptcy Cave Blog post last night, news broke that a bipartisan effort was underway in the Senate to reinstate the CSR Subsidies for two years, and President Trump said he would support it!  What??  But then, as we were editing this post today, President Trump tweeted that the CSR Subsidies were just a bailout for insurance companies – and he won’t support the new legislation.  Anyway, we give up trying to figure out what is next, folks.  Hey, is Will & Grace on?  Is T.O. dancing a salsa tonight?  And when is the next trailer for The Last Jedi going to drop?

Read More

Bankruptcy Bulletin Blamed for Blabbing Bondholders; New York Court Appoints Itself Arbiter of Who is “Legitimate Media”

April 9, 2017

Authored by:

Categories

world_war_II-talking_poster_1942We are all very used to (and very bored of) the on-going debate of what actually constitutes “the media” or “legitimate news.”  In most instances, this sort of debate pits exclusive, Columbia-educated, “proper” journalists against those who have large on-line followings and eschew any association with a Dickensian-era newspaper.  Or, as one story recently summarized it, “Corporate Media Freaks Out at Possibility of Breitbart, Infowars Being Allowed to Ask Questions [in White House Press Conferences],” full story here.

This debate has now, surprisingly, found its way into our arcane little bankruptcy world, with Murray Energy Corporation v. Reorg Research, Inc., 2017 NY Slip Op. 27036 (N.Y. County Sup. Ct., Feb. 14, 2017) (Edmead, J.).  It started with a distressed company called Murray Energy establishing an on-line “data room” for bondholders and lenders to access confidential information posted by Murray Energy about its restructuring efforts and financial performance.  For one to obtain the information, it had to sign a confidentiality agreement with Murray Energy, agreeing not to share the information with others.  According to Murray Energy, the information in the data room contained “vital clues about Murray’s business strategy and overall financial condition.”  Murray Energy was worried that the information, if widely disseminated, could help “potential hostile investors considering a possible takeover of Murray Energy (which can conceivably be orchestrated through a massive purchase of public debt).”  Moreover, according to Murray Energy, dissemination of the secret data “would also give competitors in the coal industry an unfair advantage because it offers a detailed and concrete window into how Murray Energy is handling the ups-and-downs of the turbulent coal market.”

While Murray Energy was attempting to control its information flow, a company known as Reorg Research smelled a story.  Reorg Research is a subscription-only service, gathering hard-to-find information on restructuring matters for its paid subscribers (at a rate of $30k-$120k/year, which we tightwads at The Bankruptcy Cave think is a lot!).  Reorg Research touts itself as a media company, focusin on “market-moving intelligence, and independent analysis on the distressed debt and leveraged financed markets.”  Importantly, Reorg Research subscribers must also agree, in writing, not to disseminate information learned from Reorg Research.

Anyway, back to Murray Energy.  In August of 2016, Reorg Research published several in-depth stories about the distressed coalminer.  The stories allegedly contained information that Murray Energy thought could only come from those who leaked data from a lender presentation Murray Energy had posted to its confidential data room for lenders and investors.  Murray Energy sued Reorg Research, demanding to find out who was the canary.  In response, Reorg Research relied on New York’s “Shield Law” (N.Y. Civil Rights Law § 79-h), which protects journalists from having to disclose confidential sources.

Protection by the Shield Law, however, requires one to be a “professional journalist,” which is defined by the Shield Law as

one who, for gain or livelihood, is engaged in gathering, preparing, collecting, writing, editing filming, taping or photographing of news intended for a newspaper, magazine, news agency, press association or wire service or other professional medium or agency which has as one of its regular function the processing and researching of news intended for dissemination to the public . . .

Here, because Reorg Research did not disseminate its stories to the public – and indeed, prohibited such dissemination through agreements with its subscribers – it could not rely on the Shield Law.  Curiously, the Court took great pains to distinguish a ruling that the ratings agency Fitch would be covered by the Shield Law despite that Fitch stories / bond ratings required a subscription.  Apparently Fitch made such items free to the public “for a limited time” on its website.  There is no discussion of what this “limited time” is, and so we at the Bankruptcy Cave are left wondering what the real difference is between Fitch and other ratings agencies that require subscriptions, and Reorg Research, which appears to be identical (albeit perhaps more expensive).  We are also concerned that the Court seemed to dispute that there is any public purpose served by companies like Reorg Research.  Indeed, the Court’s characterization of Reorg Research’s customers as “vulture investors” (a low blow, to us) appears to the Bankruptcy Cave as an inappropriate pre-judging of who is “good media with good readers” and who is “illegitimate media with bogus readers.”  Does this sound familiar to anyone?  Courts, like candidates, really have no place judging what media is legitimate and what it not.

At the end of the day, we wish Murray Research would have simply issued a subpoena to the users of its data room.  If one of them was the leak, we could avoid this entire, unsettling argument of what is a “professional journalist.”

 

 

Read More

Supreme Court Completely Endorses Critical Vendor Theory! Well, Not Completely. But Almost!

We at the Bankruptcy Cave are not very surprised by the ruling yesterday in Czyzewski v. Jevic Holding Corp.  The Supreme Court in Jevic reviewed a Bankruptcy Court’s decision to approve a settlement (with a distribution of proceeds that contravened the Bankruptcy Code’s priority scheme) in conjunction with dismissing the bankruptcy case of the Chapter 11 debtor Jevic Holding Corp. According to the Bankruptcy Court, because the distributions would occur pursuant to a “structured dismissal” rather than a confirmed plan, the failure to follow the creditor priority scheme did not bar approval.  In short, the Bankruptcy Court did not confirm a plan of reorganization for the Chapter 11 debtor, in which sufficient creditor support can re-order some of the Bankruptcy Code’s priority scheme.  Nor did the Bankruptcy Court convert Jevic’s Chapter 11 case to Chapter 7, in which the Code’s creditor priority scheme can never be changed. Instead, the Bankruptcy Court allowed a “structured dismissal,” a hybrid unrecognized by the Code (but oh so popular among the Delaware set).  In a “structured dismissal,” a case is dismissed and, through opaque deal making, cash proceeds of the estate are shifted to some creditors that Congress afforded lower priority (like general unsecured claims in Jevic’s bankruptcy case) despite nothing being paid to higher priority creditors (like unpaid wage claims of truck drivers in Jevic’s bankruptcy case).

Nothing in the Bankruptcy Code allows such re-ordering of creditor priorities as part of a dismissal.  Thus, in Jevic, the Supreme Court rejected the proposed “structured dismissal” and sent the case back to the Bankruptcy Court to distribute the money as the Code requires.  In summary, Orwell’s adage that “all animals are equal, but some animals are more equal than others” George Orwell, Animal Farm 112 (Signet 1962 edition) (1946) has no place in the Bankruptcy Code, according to the Supreme Court in Jevic.

But a truly astounding part of the Supreme Court’s opinion in Jevic provided (in dicta, we grudgingly admit) strong support for the oft-criticized “critical vendor” theory used in many large Chapter 11 cases to immediately pay seemingly important (i.e., “more equal”) unsecured creditors while other creditors sit and wait.

Specifically, the Supreme Court’s opinion in Jevic went to great lengths to mention the many valid circumstances in which a bankruptcy court “has approved interim distributions that violate ordinary priority rules.”  The Court specifically noted “‘first-day’ wage orders that allow payment of employees’ prepetition wages, ‘critical vendor’ orders that allow payment of essential suppliers’ prepetition invoices, and ‘roll-ups’ that allow lenders who continue financing the debtor to be paid first on their prepetition claims.”

The Court noted that such orders are based on findings that these priority-skipping payments “would ‘enable a successful reorganization and make even the disfavored creditors better off.’” (Jevic, citing, inter alia, In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004)).  Thus, such payments would (or could? or always? — it is hard to say how strong this dicta is) be allowed due to a “significant offsetting bankruptcy-related justification.”

This was a shocker.  Not because we think it is wrong – the Supreme Court is dead right that the exigencies of the initial days in Chapter 11 can permit certain limited payments to pre-petition, unsecured creditors – but because the Court did not have to delve into these theories to decide Jevic.  The Supreme Court could simply have stated that nothing in the Code’s “dismissal” provisions allow for priority skipping, and that would be that.  But instead, the Court’s expansive reasoning buttresses “critical vendor theory” and similar theories that allow for some creditors to be paid immediately upon a Chapter 11 – if there is a “significant offsetting bankruptcy-related justification.”

In conclusion, Jevic did not surprise us with its ruling, but surprised (and impressed) us with how far it went to provide added support for critical vendor theory.  Jevic is, as one may say, a critical case for those in the bankruptcy world.

Read More

No Trustee Left Behind – Another Bankruptcy Court Requires Colleges to Return Tuition to the Bankruptcy Estate

February 13, 2017

Authored by:

Categories

b09036864402bfedc690a2f80d6de804Another bankruptcy trustee catches another hapless college unaware.  In Roach v. Skidmore College (In re Dunston), Bankr. S.D. Ga. (Jan 31, 2017), a trustee appears to win the next battle of “bankruptcy estates v. child’s college,” ruling that an insolvent parent who paid the college tuition of an adult child made a fraudulent transfer to the college.  Thus, the unsuspecting college will likely have to return the tuition to the parent’s bankruptcy estate.

The theory is simple (albeit unsettling to some).  Under Section 548 of the Bankruptcy Code (and applicable state law, as a back-up), if any debtor makes a transfer to a third party while insolvent, and does not receive reasonably equivalent value in return, the debtor’s bankruptcy trustee may reclaim such transfer for the benefit of unsecured creditors (and for the benefit of the trustee’s fees, of course).  In plain English, the recipient got the money, and didn’t provide anything to the insolvent party which made the payment.  That’s unfair to the insolvent payor’s other creditors (who are left with crumbs, or nothing), and thus a “fraudulent transfer” can be reclaimed for all such other creditors.  Congress has excluded some charitable contributions and tithes from attack. 11 U.S.C. § 548(a)(2).  But Congress did not include tuition paid for an adult child in the list of exceptions, and so it is not the place of courts to graft a “adult child college tuition” exclusion to the statute.

We had a prior post on this, here.  In that post, we went over a contrary ruling from the District of Massachusetts, DeGiacomo, as Chapter 7 Trustee v. Sacred Heart Univ. (In re Palladino), Bankr. D. Mass. (Aug. 10, 2016).  In that case, the Bankruptcy Court ruled against the Chapter 7 trustee by holding that the future benefits an adult child may get from a college education can provide “reasonably equivalent value” such that the parent’s tuition payment to the college is not voidable.  As the Palladino Court held, “[a] parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent.  This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.”  (Other coverage of Palladino and opinions like it, including this recent ruling from Georgia, can be found in the outstanding coverage of Katy Stech of the Wall Street Journal  here, here, and here (alas, WSJ subscriptions required)).

Now, in Roach v. Skidmore College (In re Dunston), the Bankruptcy Court for the Southern District of Georgia has ruled to the contrary.  In Dunston, the Court rejected the argument that an indirect economic benefit of having a well-educated and (hopefully) a gainfully employed adult child is “reasonably equivalent value.”  Instead, according to Dunston, paying an adult child’s tuition is simply honoring a “moral obligation,” and not any legal duty or actual, monetary obligation of the parent.  The college – in this case, the august institution Skidmore College, near beautiful Saratoga Springs and home to some seriously rockin’ a cappella – provided no value to the debtor parent.  Thus, the Dunston court allowed the fraudulent transfer action to go forward – and its will eventually be successful, in The Bankruptcy Cave’s view.

Our previous post on this issue criticized what we believed was a results-oriented decision in Palladino.  To be sure, few like the idea of our educational institutions having to fully refund tuition payments which they accepted innocently, without knowing of the parent’s insolvency.  But despite these misgivings, Palladino was incorrect under a plain reading of the statute – any time an insolvent debtor gives money to a third party, and receives nothing in return, that money should come back to the bankruptcy estate to benefit all other innocent creditors.  The Dunston decision is right.

This problem cries out for a legislative solution.  Until then, bankruptcy courts will honor the wording of the fraudulent transfer status and require colleges to return the tuition (Dunston) or find “future economic value” to the parent that is, in the view of The Bankruptcy Cave, entirely speculative (Palladino).  While there are many problems with our current bankruptcy statutes, this one really needs a solution.

Read More

A Debtor’s Allegedly False Financial Statement Doesn’t, At All, Excuse a Lack of Lender Diligence

January 9, 2017

Authored by:

Categories

A decision rendered during the sometimes peaceful interlude between Christmas and New Year’s is worth reading, and heeding.  Hurston v. Anzo (In re Hurston), Adv. Proc. No. 15-2026 (Bankr. N.D. Ga. Dec. 27, 2016) is a helpful reminder to anyone representing lenders or creditors which are hell-bent-for-leather to pursue a non-dischargeability claim against a debtor that submits a false written statement (e.g., a personal financial statement) to obtain credit.  Often, in the fervor of the start of a bankruptcy case, the creditor (and its lawyer) will make great hay from the fact that a debtor may have lied in a pre-petition credit application, or forbearance agreement, or other written medium.  However, the facts of Hurston show that a creditor (and its lawyer) should pause, take a breath, and critically evaluate whether the creditor actually relied on the pre-petition writing from the debtor, and whether that creditor’s reliance was also, in fact, reasonable.  If not, then the creditor deserves a serious challenge from its own counsel on the wisdom of pursuing a expensive, and likely unsuccessful, non-dischargeability claim.

We don’t need to go in detail on the debtor’s alleged falsehoods – that is not the point of Hurston.  Instead, Judge Sacca of the Bankruptcy Court for the Northern District of Georgia covered in great detail how the creditor didn’t not rely on the allegedly false statements, and even if it did, its reliance was not reasonable.  The key takeaways from the opinion – and helpful advice for any lawyer that is thinking about taking on a “false statement” non-dischargeability action under 11 U.S.C. sec. 523(a)(2)(B) – are what the creditor in Hurston did and didn’t do.

First, where the creditor does not perform any material diligence on the false statement (here, a personal financial statement), then the creditor will have a difficult or impossible time showing that it “reasonably relied” on the allegedly false financial statement.  The creditor should ask for bank statements, tax returns, information from accountants, or other, third party evidence to back up information form a debtor.  If the creditor didn’t perform any follow up diligence, you should advise the creditor (right at the outset) that its claim may fail.

Second, this is especially true where the creditor and debtor do not have a prior relationship.  A prior relationship might (we emphasize, might) provide indicia of reliability of the debtor and its financial wherewithal to overcome a lack of diligence.  But if there is no prior relationship, the creditor should be ready to show that it did more diligence.

Third, where a financial statement (or other writing on which the non-dischargeability claim is based) contains “red flags,” including matters a reasonable creditor would question or that the specific creditor should know to question, the creditor must show that it followed up on those “red flags.”

Fourth, a debtor with an alleged strong financial reputation, or that appears to be wealthy based on appearance and community activity, does not excuse the creditor’s obligation to perform diligence on any written statement or financial statement.  In short, an argument based on “the debtor was a pillar of the community” will not go to show reasonable reliance by the creditor on an otherwise questionable financial statement or other writing.

Fifth, the creditor should be able to show it had established criteria to evaluate the credit being extended – and that those criteria were used and evaluated as a critical part of making any decision to extend credit.  A lack of rules and procedures to evaluate financial statements or other written submissions, or a failure to follow those procedures, will be very harmful to the creditor’s claim.

When you read 11 U.S.C. sec. 523(a)(2)(B), and in particular its requirement that the creditor “reasonably relied” on any alleged false statement, the Hurston decision is not surprising.  But Hurston remains a very helpful reminder for any creditor’s lawyer to critically examine the creditor’s case at the start of the matter.  The lawyer must cross-examine the creditor to get past the allegations of the debtor’s falsehoods (which the creditor will trumpet as much as you let it), and spend a great deal more time on whether the creditor did any diligence on the allegedly false written statements.  This can be an awkward conversation with your client – and perhaps perceived as blaming the victim – but it will be far more awkward to later explain to your client why the non-dischargeability action did not succeed.

Read More

This Just In – Supreme Court to Provide Clarity on Whether Collection of Time-Barred Debts in Bankruptcy Violates the Fair Debt Collection Practices Act.

October 11, 2016

Authored by:

Categories

jabez-stoneWe all remember The Devil and Daniel Webster – the Devil comes to collect a seven year old debt (secured by Jabez Stone’s soul), only to be foiled by the great trial lawyer Daniel Webster – thanks to a skilled litigator, the old debt is forgiven!

But that isn’t the only example of years’ old debt becoming a real matter of contention.  Earlier today, the Supreme Court granted certiorari on an issue that (a) is pretty important in the world of consumer debt collection, and (b) makes some folks pretty darn furious. The issue is this:  if you file a proof of claim in a bankruptcy case, and you know such claim is barred by the applicable statute of limitations, are you committing a “misleading” or “unfair” practice under the Fair Debt Collection Practices Act (FDCPA)?  (Coverage of the case and copies of the briefs can be found here, on the SCOTUSBlog.)

Who does this?  There are lots of funds out there that purchase charged-off consumer debt.  Some of that debt is quite old.  John Oliver has spoken extensively about this industry on his show – here’s a link to the hilarious (or infuriating, it is actually both) episode where he bought, and forgave, $15 million in old, uncollectible medical debt.

Why do people do this?  Those old and cold claims can lead to a nice little recovery when the party owing the funds files a Chapter 13 case that pays creditors 5, or 10, or even a penny on the dollar.  In Chapter 13 cases, no one really has an incentive to scrub all the claims that are filed, and so a great many of these claims – completely invalid, mind you – slip by unnoticed and get a distribution.  If the charged-off debt is sold for pennies on the dollar – or fractions of a penny – the returns are spectacular, even though the old debt is in every way invalid.

How Can These Invalid Claims Get Paid?  It is because no one raises an objection to them during the bankruptcy case.  The Debtor doesn’t have any interest or incentive to scrub the claims – he or she is paying the same amount over the course of the Chapter 13 plan no matter how large or small the creditor pool is.  The Debtor doesn’t have the money to scrub the claims, or any incentive to do so.  The Chapter 13 trustee has no practical ability to scrub the claims – there are thousands, or tens of thousands, of Chapter 13s pending in every single bankruptcy court across this country – no Chapter 13 trustee has the time or ability to review each claim.  The other creditors won’t do it – why would a creditor owed, say, $2,000, scheduled to get a distribution of $100 in the case (over 3-5 years, to boot), spend a few thousand dollars reviewing each and every proof of claim field in the bankruptcy case (there are often a few dozen claims, or more)?  And without any party to note the time-barred claim to the Bankruptcy Court, the Bankruptcy Court never knows to disallow the claim.

So What will The Supreme Court Do?  The Supreme Court will decide if this practice is “misleading” or “unfair” as those terms are used in the FDCPA.  If the Supreme Court rules against the debt collectors, they will be liable for attorneys’ fees and additional damages for each invalid claim that is filed.  The practice will end in an instant, as now there would be penalties for seeking recovery of time-barred debt.  But if this practice does not violate the FDCPA, then the bankruptcy system will continue to be used to collect time-barred debt.  A great post going into the competing considerations in detail can be found here.

This is a tough one for The Bankruptcy Cave.  Legitimacy of the system requires that invalid claims receive no distribution.  Holders of valid claims should not be taxed due to an inability of any other party to practically review the claims.  On the other hand, an expired claim is subject to a defense – and it is not a creditor’s job to raise defenses to its own claims.  We think this will be a great ruling, either way.  Stay tuned!

Read More

Over Four Hundred Years of Law on Fraudulent Transfers, Flushed Down the Drain

August 15, 2016

Authored by:

Categories

In 1571, Parliament enacted a law, sometimes known as the Statute of 13 Elizabeth, creating one of the greatest means of creditor protection – the proscription of fraudulent transfers.  As Professors Baird and Jackson stated, the law prevents an “Elizabethan deadbeat [from selling] his sheep to his brother for a pittance.”[1]  The law has progressed, covering not just intentional acts to hinder, delay, or defraud creditors, but also “constructively fraudulent transfers” in which a third party who is not in on any con nonetheless gets something from an insolvent debtor for less than reasonably equivalent value.

These are simple, straightforward principles, with which no bankruptcy professional (or really, anyone) could quibble.  You got stuff and you didn’t pay for it, so you need to give it back.  There are some exceptions.  Voiding transfers in the securities industry, for instance, could up-end financial markets.  So Congress added Sections 548(d)(2)(B) – (E) of the Bankruptcy Code to protect various securities-related transfers from avoidance as constructively fraudulent transfers.  Likewise, Congress has excluded some charitable contributions and tithes from attack. 11 U.S.C. § 548(a)(2).

Now, a Bankruptcy Judge (which is not, the last time we checked, a Congressional body which can change the law), has grafted another exception to Section 548: transfers by a parent to help an adult child, where the adult child might (or might not, who knows) return the favor sometime in the future.  This is the law under DeGiacomo, as Chapter 7 Trustee v. Sacred Heart Univ. (In re Palladino), Case No. 15-01126, Bankr. D. Mass., Docket No. 76 (August 10, 2016) (Here’s a link to the opinion).  In Palladino, the Chapter 7 Trustee sued a university, which had received tuition money from the insolvent Debtors.  But the Debtors didn’t get anything for the payments – it went to pay the tuition of the Debtors’ adult child.  Thus the Chapter 7 Trustee sought to get the money back from the university, and distribute it to rightful creditors.

In Palladino, one of the parents / debtors defended the payments on moral grounds, stating “I am her mother and she shouldn’t have to come out of [Sacred Heart University] saddled with thousands of dollars in loans.”  Morality has nothing to do with constructively fraudulent transfers, and so we don’t know why this statement made it in the opinion.  Instead, the Bankruptcy Judge ruled against the Chapter 7 Trustee by holding that future, entirely speculative benefit can somehow provide “reasonably equivalent value” such that a transfer is not voidable.  As the Court held, “[a] parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent.  This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.”  Wow.  No caselaw is cited by the Court for this proposition.  Indeed, none of us at the Bankruptcy Cave have ever heard of future, speculative benefits serving as a defense to a constructively fraudulent transfer action.  As to children taking care of parents, we suggest a review of King Lear (you know, “how sharper than a serpent’s tooth . . .”).

Future debtors, please take note of this remarkable opinion.  If you want to help a family member, then give them money before bankruptcy, for any plausible (or implausible reason).  Sick relative?  Down on their luck relative?  Relative that wants to invest in uranium stock, purchase the Brooklyn Bridge, or bail a Nigerian prince out of jail?  The Palladino ruling creates a debtor-friendly “it tugs on your heartstrings” / “blood is thicker than water” defense to fraudulent transfer actions.  And preferences too!  Why not?  Palladino is a safe haven for most or all of these wrongful actions.

Now, we understand the basis for the Palladino ruling.  Palladino was one of those “every possible ruling seems unfair” cases, in which a Chapter 7 Trustee was suing the child’s university, seeking to recover pre-petition tuition payments made by the insolvent parents for the benefit of the innocent child.  These cases are awful.  The child did nothing wrong.  The university did nothing wrong.  Indeed, the university really can’t police against this, unless it enacts a rule that every tuition payment must come from a check written on the student’s account.[2]  And even then, that would just make the innocent child / student the defendant.  That sticks in some people’s craw.[3]  On the other hand, creditors are unpaid – why should a kid get free or subsidized college when creditors have to lick their wounds? In any event, a bill is now kicking around Congress to exempt payments like these from fraudulent transfer attack under Section 548 of the Bankruptcy Code, as Lynne Xerras of Holland and Knight has written here.

So we understand the ruling.  But we still don’t like it.  Bankruptcy judges are not legislative bodies.  Bankruptcy judges can’t change the law, or create exceptions based on subjective principles of fairness.  If lawsuits like Palladino shouldn’t be allowed, it is up to Congress to make that decision, and not bankruptcy judges.  We are afraid that the Bankruptcy Code, the Statute of 13 Elizabeth, and creditor protections of all sort, all just got a little weaker through Palladino.

[1]           Baird & Jackson, Fraudulent Conveyance Law and Its Proper Domain, 38 Vand. L. Rev. 829, 852 (1985)); a full copy of this classic is located here.

[2]           And even then, would the school be automatically immune from attack as an immediate transferee under Section 550(a)(2)?  Ug.  More briefing on legal issues is not the solution to this problem.

[3]           The WSJ’s bankruptcy blog has covered this issue a lot.  See http://blogs.wsj.com/bankruptcy/2015/05/06/whats-behind-bankruptcy-lawsuits-over-college-tuition/; for Friday’s coverage of Palladino, if you have a WSJ subscription, you can click here.

 

 

Read More

The A++ Forms and Resources–Defending Depositions, Prepping Your Witness, Practical Tips and Key Errors to Avoid

August 10, 2016

Categories

Editor’s Note:  Ok, we know, this is waaaay to long for a blog post.  But this is just too good not to share!  In our continuing effort to avoid re-inventing the wheel, getting the easy stuff down to checklists, and helping us lawyers impress our virtually-impossible-to-impress clients, we offer our most recent post: everything you need (actually, must) to do to get ready to defend a deposition (including the critical steps to take to prepare your witness).  We have previously posted in our A++ Forms and Resources (TM), great checklists on the timeline of all steps to prepare to take the perfect deposition, the script you should always have in your lit bag to make a perfect record for a no-show deposition (it happens!), and the super-comprehensive list of opening questions to get to everything a witness could know.  All of these, and the post below, are available to send to you in Word form so you can integrate them into your own work product.  Just shoot an email to Wendy Godfrey, Leah Fiorenza, or me, and we would be glad to send any of them to you (and they are much better in Word – the blog machine we use here at the Bankruptcy Cave just ain’t really user friendly in preverving spacing, bullets, sub-bullets, etc.).

 

Part I:           What to Provide the Deponent in Advance of the Preparatory Session

Part II:        Setting Up and Details about the Preparatory Session

Part III:       Key Points for You in the Actual Meeting with the Deponent

Part IV:       30 Things Your Deponent Should Take Away from the Preparatory Session

Part V:        The Deposition Itself – Breaks

Part VI:       The Deposition Itself – Objections

Part VII:     The Deposition Itself – Rehabilitating the Deponent and Correcting the Record

 

Part I: What to Provide the Deponent in Advance of the Preparatory Session

Should You Provide Documents to the Deponent?

  • If a document is used to refresh a witness’ recollection, that document is discoverable; opposing counsel can and will see it, and ask about it.[1]

 

  • If a summary chart is prepared, that also is discoverable.

 

  • In general, assume that everything you show a deponent to prepare for the deposition is discoverable, and so if in doubt, give the deponent nothing (except in a Rule 30(b)(6) deposition – see below).

 

  • Exception: You should provide the deponent with the complaint, answer, perhaps a motion to dismiss and response – just the key pleadings.

 

  • Related Issue: Should Witness Be Shown Documents During the Preparation Session?

 

  • Do you want your witnesses to be “cold?” Or do you want your witness to demonstrate the strengths of the case? We suggest the latter – you will have to decide for your case.

 

  • Senior executives don’t know everything going on beneath them however, so it is fine for them to be a bit cold, unless they are your key witness.

 

  • Suggested best practice: if the witness received, sent, or was copied on a relevant document, you should go over it with them so they are ready for questions.

 

  • Rule 30(b)(6) Depositions:

 

  • You must produce a knowledgeable witness. It does not have to be an employee – it can be a consultant, or other third party, if that person is the most knowledgeable. “I don’t know” is not acceptable as to a question fairly within the category that witness speaks to. So you must think about all the topics identified, and ask the witness about them in detail, well in advance of the deposition.

 

  • You can, and should, in a Rule 30(b)(6) deposition, work to get the witness up to speed on their testimonial categories.

 

  • Often, a separate person is designated as to highly technical or financial issues.

 

  • Recent Case: Opengate Capital Group LLC v. Thermo Fisher Scientific, 2015 U.S. Dist LEXIS 120022 (D. Del. Sept. 8, 2015) (counsel held liable for sanctions, and new Rule 30(b)(6) deposition ordered, when the witness was knowledgeable about some topics, but the witness did not make inquiry of others in the company that knew the most about those topics).

 

Part II: Setting Up and Details about the Preparatory Session

 

  • Make sure that your witness blocks off ample time to meet with you in a place where there will be no interruptions or distractions by other obligations.

 

  • Allow a lot of time for the prep session: 
  • If the witness is key to the case, the prep session should be 4-8 hours.

 

  • If the witness has never been deposed before, add two hours to the prep session.

 

  • In addition, the prep session should not be the full day before the deposition. Your witness is going to leave the session somewhat comfortable, but also somewhat confused, demoralized, and nervous. You may leave the session confused and demoralized too, if the witness tells you things you did not know. Best practice – have the prep session a week before, and then a re-fresh the night before or morning of. 
  • Except for the most seasoned witnesses or the most unimportant witnesses, the prep session can never be the evening before, or the morning of, the deposition. 
  • The witness must be able to give you complete attention for a long as you need. For a complex case, preparing an important witness will easily occupy several hours.

 

  • During the prep session, cover the following, in addition to the next two sections of this paper:

 

  • Explain the mechanics of a deposition. This may be the witness’ first time being deposed, or first time involved in the legal system.

 

  • Explain what a deposition is, who will be present, where people will sit, the court reporter’s role, objections, and the like. (All of this is covered in detail in the next sections.)

 

  • This is critical to helping the witness to relax.

 

  • A typical approach for you to take in preparing the witness is as follows (and then go into specifics, as discussed in the next sections):

 

  • Ask the deponent open-ended questions.

 

  • Start broad, then get more narrow.

 

  • Does the deponent understand the key parts of the case? The key factual disputes?

 

  • Does the deponent understand what is important and what is not?

 

  • Does the deponent help solidify your theory of the case, or not? (Recall, this is why we suggest that the prep session be a week before – you need time to think about what to do if you are getting ready to put up a witness that is really, really bad for your case.)

 

  • Don’t suggest alternative testimony – that will be a very bad day for you. You can go through the key elements of the case, and ask them again. But at bottom, their testimony is what it is, and if the deponent changes their story, you will be the one to blame, not them.

 

  • If the witness struggles, you need to be thinking about your case, a lot.

 

  • But if the witness simply lacks confidence, you can build them up – explain they are entitled to their side of the story, the client is in the right, and the other side is in the wrong. Show the deponent you are a fighter based on the facts, and your deponent will feel like one too.

 

  • Group witness preparation?
    • Though convenient, you should never do this. Your opponent will learn this, and call it out as collusion to get everyone on the same page.

 

  • Showing another transcript to the Deponent? 
  • We advise against it. As with group preparation, your opponent can argue the witness used an outside source to shape his or her testimony. Remember, the deponent can be asked – and has to answer truthfully – what he or she did to prepare for the deposition!

 

 

Part III: Key Points for You in the Actual Meeting with the Deponent 

  • Re-Mirandize the Witness

 

  • Has the deponent produced everything?

 

  • Notes?

 

  • Email files?

 

  • A notebook?

 

  • Ask the witness if s/he can think of anything else s/he has, had, or has access to, and verify it was produced.

 

  • If the witness has not produced everything, and this comes out in the deposition, you will have to do the deposition again – probably with you paying for the other side’s fees and costs. Remember, this is why the prep session is a week before – sending the other side a raft of additional documents the deponent just now remembers, the day before the deposition, will be your fault.

 

  • Don’t forget to ask your client about communications outside the normal course of communication and documents, such as (i) text messages the witness may have sent that are relevant to the dispute, or (ii) posts on Facebook, Twitter, any other social media that pertain. If your client has any texts or posts about the case or underlying events, they must be preserved, and likely produced.

 

 

  • If the witness provided interrogatory answers or produced or supervised the production of documents, you should prepare the witness for detailed questions about the discovery. You must go over all of those responses with the witness in the preparation session, to ensure the witness agrees with the interrogatory answers and properly supervised the document production.

 

  • Avoid surprises – ask the client in multiple different ways about key areas of the case. You should try to confuse them, and then explain why you did that.
  • Acquaint your client with lawyer tricks, such as embedding questions with false assumptions, or speeding up the questions.

 

  • Beware of the deponent that is in-house counsel or a senior executive. They often think “I can handle it” without realizing the other side is much more formidable then they think. This is where it is key that you prepare questions you think the other side will ask, and go through them in detail. Extensive role-playing is a must.

 

  • “I Represent You”

 

  • Interestingly, you need to explain this to corporate employees during their prep session. Otherwise, be ready for the following colloquy:

 

  • Q: Are you represented by an attorney in this deposition?

 

  • A: No.

 

  • Q: Does Mr. Bryan Cave represent you?

 

  • A: No.

 

  • Q: Tell me everything you have discussed with him.

 

  • Objection: That is privileged information.

 

  • Q: But she said you didn’t represent her……[etc.]

 

  • In other words, you must tell the witness during the prep session that you are his or her lawyer.

 

 

Part IV: 30 Things Your Deponent

Should Take Away from the Preparatory Session

  1. Tell the truth: A lie may lose the case. You must testify accurately about what you know. If you tell the truth and tell it accurately, nobody can cross you up. You should not exaggerate. If you lie, I will have to correct you, and that will be absolutely awful. If you stick to the truth of what you did, what you saw, and what you heard, you will be on firm ground. No one knows what you did, saw or heard better than you.
  2. If you are concerned about something you know, discuss it candidly with me, now.  Do you feel you may get in trouble if you answer truthfully? Is there anything you really don’t want the other side to know about this case or its underlying facts? Whatever it is, you need to tell me, now.
  3. Avoid jargon. If you have to use a word or term that the average person isn’t familiar with, then explain what it means.
  4. Don’t lose your temper no matter how hard you are pressed. Lose your temper and you may lose the case. If you lose your temper, you have played right into the hands of the other side, and the transcript will read like you are at fault, to blame, or a hothead.
  5. No jokes or wise cracks. Don’t make facetious remarks about the questions, the other lawyer, or the case. No one reading the transcript will take you seriously, and they will think you are a wise ass. You will come off terribly.
  6. Don’t try to outsmart the questioner or get cute. You are not here to “win” the deposition or show the other side up. You will end up looking bad.
  7. Don’t spar with the other lawyer. You will lose, and will look like you are hiding things. Your lawyer will spar for you – that is why I am there. Don’t argue with the questioner.  Don’t ask questions of the questioner (unless you don’t understand the question). Don’t try to outsmart the questioner. Remember – the questioner has a right to ask you questions. You have a duty to answer. If you want to take it out on someone by criticism, sarcasm, or argument – don’t, for you will be in the wrong, completely.
  8. Be courteous. Being courteous is one of the best ways to make a good impression on any party reading the transcript or viewing the video deposition. Be sure to answer “Yes, sir / ma’am” and “No, sir / ma’am.”
  9. Listen carefully to each questions. This requires intense concentration. Don’t be thinking about your last answer or what someone else is doing in the room. Listen to the entire question.
  10. If you don’t understand a question, say so.
  11. If you didn’t hear all of the question, say so.
  12. Pause a few seconds before you answer. This gives you time to think about your answer and gives your attorney time to object. Stop if your attorney objects. Don’t blurt out your answer. Wait for the question to be completed. Don’t anticipate the question.
  13. Listen to your attorney’s objections. It may be a technical objection for the record. However, many objections may alert you to a problem with the question.
  14. Don’t guess. If you don’t know, say so. You do not have to know the answer to every question asked. It is okay to just say “I don’t know.” Don’t attempt to testify to facts you don’t know because you think you should know those facts, or because you assume those must be the facts. Testify to only what you personally know. Do not volunteer who might know.
  15. Don’t volunteer! You must answer the question that is asked but answer only the question asked. Keep your answers short. You are not required to answer “yes” or “no” and you may explain as part of your answer, but you should do so only to make your answer truthful and complete. Keep it short. After your answer, stop. If there is silence after your answer, don’t feel compelled to expand upon your answer. Wait for the next question. Do not fill the silence – practice this.
  16. Do not memorize your testimony. If you do, you will appear to be a liar. Justice requires only that a witness tell his or her story to the best of his or her ability. Simply answer the questions asked in your own language.
  17. Documents: Be entirely comfortable with a document before you answer any questions regarding any document. Read or review the entire document first.
  18. Beware of questions involving numbers, including dates or times. If you make an estimate, make sure that everyone understands that you are estimating.
  19. Give a positive answer when you can. Don’t let the lawyer on the other side catch you by asking you whether you are willing to swear to your version of what you know by reason of seeing or hearing. If you were there and know what happened or didn’t happen, don’t be afraid to “swear” to it. You were “sworn” to tell the truth when you took the stand. Don’t say “I think”, “I guess”, or “maybe”, when you mean to be more positive in your testimony. It is better to say “as I recall” or “in my opinion”.
  20. Be on guard always. The questioner is not your friend. Do not chat with the examiner before, during, or after the deposition. They will try to make a connection with you; you don’t want this.
  21. The deposition isn’t over until you leave the building. Don’t let down your guard. Some lawyers will let you think they have finished, you relax, and then they ask you twenty of the toughest questions.
  22. The examiner may suggest that your testimony is inconsistent with some document, someone else’s testimony, or your prior testimony. Don’t believe it unless you are first convinced there is an inconsistency. Then you may explain it. Simply give your best recollection. If the lawyer says your testimony is inconsistent with a document, ask to see it. Then read it all. Remember, the document may not be accurate. It is not your job to jive everything for the other side, or win the case, or explain “how it all works.” It is only your job to testify to things you know.
  23. Don’t let the lawyer put words in your mouth. If he attempts to rephrase your testimony by asking “Is it your testimony that….” or “are you saying….” your answer may be “That is not what I said and I’ll stand on the answer I gave previously” or “I’ll stand on the answer I gave before.” Don’t assume the lawyer has accurately summarized your testimony. [Explain to the witness this is also where you may object.]
  24. If you are asked the same question several times, stick with your original answer, if accurate. Don’t change it simply because the same question is asked in a slightly different form. This is a common trick.
  25. Beware of leading questions containing half-truths. The lawyer may ask you a question containing facts which are only half-true or containing facts not within your knowledge. Don’t let the lawyer put words in your mouth. Don’t answer yes or no; answer in your own words.
  26. Beware of questions which begin “Isn’t it a fact …” and “Is it fair to say ….” These questions usually contain implications which may be only partly true. If you don’t agree, say so. If you don’t know, say so.
  27. Beware of alternative questions. “Did you get this information from A or B?” There may be several sources, including those not mentioned.
  28. Everybody makes mistakes. If you gave a wrong answer, say so. You have a right to correct your answer. It is better to correct a wrong answer at the deposition rather than at trial.
  29. Take your time. This is not a race. Don’t rush. Pause after each question and think about your answer before you respond. Then answer.
  30. Breaks. Do not hesitate to ask for a break at any time. This is especially true if you are losing your concentration, are becoming tired, or you are starting to lose your temper. [Explain you will also help with that by monitoring the tone and attitude of the witness, and will ask for breaks when the witness needs it.] If a question is pending when a break is sought, you must answer the question, but then we will break for a few minutes.

 

Part V: The Deposition Itself – Breaks

 

  • The deponent should be permitted to take them whenever necessary. The general rule is to break every hour, for 5-10 minutes.

 

  • Some questioners will try to finish a line of questions before breaking. It is not necessary to honor the request, so long as you do not appear to be impeding, delaying or frustrating the fair examination of the deponent. See Fed. R. Civ. P. 30(d)(2).

 

  • In most jurisdictions, you cannot communicate with a client about the case or the deposition after the deposition starts.

 

  • Thus, following each and every break, your deponent should expect to be asked whether she consulted with counsel on break and, if so, what was said. And your deponent must answer that truthfully.

 

  • Beware of continued depositions!! Your opponent can assert that anything said to the deponent during the days or weeks between testimony is no longer privileged.

 

  • For a great, fifty state survey in this area, see David S. Wachen and George Hovanec, Can We Talk? Nationwide Survey Reveals Wide Range Of Practices Governing Communication With Witnesses While Defending Their Deposition, published by the Section of Litigation of the American Bar Association (Undated), available on file with the authors.

 

Part VI: The Deposition Itself – Objections 

  • Federal Rule 30(c)(2) requires that “[a]n objection must be stated concisely in a nonargumentative and nonsuggestive manner.”

 

  • Rule 30(c)(2) also requires that “A person may instruct a deponent not to answer only when necessary to:

 

  • preserve a privilege,

 

  • enforce a limitation ordered by the court, or

 

  • present a motion under Federal Rule 30(d)(3) (moving to terminate for bad faith or unreasonably annoying, embarrassing or oppressive conduct).”

 

  • How to direct the witness not to answer: “Objection, that question calls for attorney-client privileged information. I instruct the witness not to answer.”

 

  • Courts are increasingly militant in punishing “speaking objections.”

 

  • Require reading: Security Nat’l Bank of Sioux City v. Abbot Laboratories, 299 F.R.D. 595 (N.D. Iowa 2014) (counsel sanctioned, and required to prepare a training video for future lawyers, for excessive speaking objections).

 

  • As a general rule: explain any inappropriate conduct off the record first, and try to defuse it. If it persists, then put things on the record.

 

  • What objections do you have to make?

 

  • “The usual stipulations” – all objections are preserved, except as to form.

 

  • But the actual rule is very different – you need to be ready!

 

  • Objections to competence, relevance, or materiality of testimony are not waived by failure to object prior to or at the deposition, “unless the ground for it might have been corrected at the time.”   R. 32(d)(3)(A).

 

  • Timely objection is required if related to “manner of taking the deposition, the form of a question or answer, the oath or affirmation, a party’s conduct, or other matters that might have been corrected at that time.” Fed. R. Civ. P. 32(d)(3)(B).

 

 

Part VII: The Deposition Itself –

Rehabilitating the Deponent and Correcting the Record

 

  • Never leave a bad record. If the witness wasn’t given a chance to fully explain, or there are other facts the witness left out, or must clarify, then you should get into these matters on re?direct.
  • The same is true with “read and sign.” Always preserve the right to read and sign – it is rare that a deposition is completely correct, especially one that features many people, dates, numbers, or the like. You should use the read and sign process to correct things (but be aware the witness can be asked at trial

[1]               Some cases hold that a document shared with a witness may still be protected as work product, but most don’t. Assume anything you share with the witness will be seen by the other side.

Read More

You Get a Car! You Get a Car! Bankruptcy Court Gives Debtor a Car. Unsecured Creditors Get Nothing.

August 5, 2016

Authored by:

Categories

So, a ruling came out in June that we in The Bankruptcy Cave have been dying to blog about (and not just so we can use the blog title above).  Forgive the delay – heavy workloads and summer vacations often preclude timely blog posts.  But this one is a doozy, better late than never on this blog post.

In re Perez, Case No. 15-31645 (Bankr. E.D. Wisc., June 3, 2016) is one of those weird Chapter 13 cases (and we know most folks’ eyes glaze over when they read “Chapter 13” – ours do too, but just keep reading for once).  It addresses the definition of “current monthly income,” which partially drives what a Chapter 13 debtor must pay unsecured creditors over time via Chapter 13 plan.  In Perez, the debtor worked for an auto dealer; part of her pay was her regular use of a “demo” car.  She was w-2’ed for it to the tune of $625 per month, so this was a real and tangible job benefit.  She also had a personal car, a 2008 Dodge Avenger.  She would keep her personal car under her Chapter 13 plan by making payments on the debt secured by the Avenger.  So she would leave bankruptcy with two cars – one her employer provided under the terms of her employment, and also a personal car.  But her Chapter 13 plan, after figuring her “current monthly income” (in which she did not include the $625 per month value of the Avenger, hence the issue of this post), making the Chapter 13 adjustments, and deducting her allowable living expenses, resulted in unsecured creditors getting nothing.

The Chapter 13 Trustee objected – if the monthly value of her employer-provided car was instead included in “current monthly income,” then her income would be sufficient for unsecured creditors to receive a nice percentage payment.  The Bankruptcy Court rejected the argument.  First, the Bankruptcy Code has no definition of income (!?!), and so the Court looked elsewhere.  It rejected the dictionary definition of income, in which income is “a gain or recurrent benefit” – the value of a demo car she could use fits that bill, but the Bankruptcy Court didn’t buy it.  It rejected the Internal Revenue Code, under which the car’s value is clearly something on which one would pay tax, hence making it taxable income.  (Then again, the Bankruptcy Code’s definition of “current monthly income” states that it is without regard to whether income is taxable, so we get ditching the tax code. We don’t get why Congress would try to define “current monthly income” but not define “income” at all – but we digress.)  The Court then looked to census figures, as the purpose of determining “current monthly income” is to compare it against median income under the U.S. census.  Under Census Bureau definitions (which are not law, just regulatory publications), “in-kind” income does not count toward one’s census income.  So the Court liked that source of a definition of “income.”  And in addition to the Census Bureau definition, the Court noted that the $625 in monthly income attributable to the demo car was not real cash available to creditors.  So even if the in-kind value of this job benefit did count as “income,” it couldn’t be distributed to creditors – the right to use a demo vehicle is not a liquid asset.  The Chapter 13 Plan was confirmed.

I get it – except for one thing – the Debtor was allowed to keep, and pay off under the Plan, her Avenger!  We don’t understand how a Chapter 13 plan is in good faith (that requirement is in Chapter 13 too, just like in Chapter 11 – see 11 U.S.C. § 1325(a)(3)) if the plan pays unsecured creditors nothing, but allows a debtor to have two cars.  The Perez court does not address this at all.

We don’t fault the Debtor Ms. Perez.  We examined every item on the docket in her case, every single one, and she is in all respects an honest but unfortunate debtor.  This is not, at all, a wealthy person misusing bankruptcy, gaming the system to stiff creditors.  If she later leaves her car dealership job, then she will need her personal car.  And we at The Bankruptcy Cave never have an issue when BAPCPA, drafted almost entirely by the creditor lobby, back-fires to result in a pro-Debtor opinion.  (Folks, if you have never seen Judge Lundin’s live presentation skewering the back-room creditor-centric deals of BAPCPA, and the stupidity of BAPCPA’s Chapter 13 revisions, please do – it will open your eyes.  In the meantime, Judge Lundin’s editorials and analysis ring like truth.)  But Perez still gnaws at us, for two reasons.  First, unsecured creditors should really scratch their heads upon hearing of a Chapter 13 plan in which they get nothing, and the Debtor has full use of two cars. Second, how can we have a Chapter 13 system that has no definition of “income”? The Bankruptcy Code, painstakingly designed throughout the 1970s and enacted in 1978, was a careful, thoughtful balance of the interests of creditors and debtors.  Congressional meddling over the years has rendered it a cumbersome tome – there are now 28 exceptions to the automatic stay, Sections 503(b)(9) and 365(d)(4) have made Chapter 11 a graveyard for all retailers (see Isaac Pachulski’s Congressional testimony on this, and his chart showing 200,000 retail jobs lost when retailers can’t reorganize, here), and if you ever try to determine who or what is protected by the safe harbor provisions of the Code, please have a stiff drink handy.  Meanwhile, other key terms, like “income” are undefined.  What’s going on with our beloved Code?

Enough ranting.  The Code, like all things in our universe, will gravitate toward entropy, and not simplicity.  Perez is the most recent example.  It is a case that could be easily decided – either way – by a simple definition of “income.”  A definition is lacking, and so the Court simply ruled in the manner it thought best.  Perhaps in our arcane and technical world of the Bankruptcy Code, having a court rule based on what it thinks is right, is right – even if we think it got it wrong.

Read More
The attorneys of Bryan Cave LLP make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.