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Creditors Beware: Fifth Circuit Court of Appeals Expands Purview Of Potential FDCPA Violations And Furthers Circuit Split

October 23, 2016

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In Daugherty v. Convergent Outsourcing, Inc., No. 15-20392 (5th Cir. Sept. 8, 2016) the Fifth Circuit Court of Appeals recently joined the circuit split interpreting the Fair Debt Collections Practices Act (“FDCPA”) in a way that further limits debts collectors.

Under the FDCPA the term “debt collectors” is not limited to those collecting debts for others –  certain creditors collecting debts directly owed to them can be bound by the FDCPA.   This statute prohibits debt collectors from using “false, deceptive, or misleading representation or means in connection with the collection of any debt.”  A debt collector who violates the FDCPA can be forced to pay actual damages, costs, reasonable attorney’s fees and up to $1,000 of additional damages if the plaintiff is an individual or up to $500,000 or one percent of the debt collector’s net worth in a class action.

In Daugherty, the Fifth Circuit considered whether a collection letter for a time-barred debt which contained a discounted “settlement offer” but which was silent as to the unenforceability of the debt and did not threaten litigation could mislead an unsophisticated consumer to believe that the debt could be enforceable in court and thus violate the FDCPA.

There,

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Executive Compensation Under Section 503(c) – The Sports Authority Story

October 18, 2016

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A recent, and highly publicized, decision from the case formerly known as Sports Authority, In re TSA WD Holdings, Inc. et al., Case No. 16-10527 (MFW), Bankr. D. Del. (Docket #2863, Aug. 31, 2016), allowed the defunct company to pay three unnamed senior executives $1.425 million in “incentive pay” to remain with the company and oversee its liquidation.[i]  Judge Mary Walrath granted Sports Authority’s[ii] Motion for Order (A) Approving Modified Executive Incentive Program and Authorizing Payments Thereunder and (B) Authorizing the Debtors to File the Unredacted Modified Key Employee Incentive Program Under Seal (Docket #2746) (the “EIP Motion,” a copy of which is here) over the strenuous objection of the U.S. Trustee (Docket #2809) (the “UST Objection,” a copy of which is here), and only after she had denied a similar from the Debtors request a month earlier.  More importantly, Judge Walrath authorized the incentive payments in a case where Sports Authority’s primary assets had already been liquidated, Debtors would almost certainly pay nothing to unsecured creditors, and the estate may or may not be administratively insolvent.  The Sports Authority example is informative for three reasons: 1) it demonstrates how a company that needs

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California Court Rejects “Sham Guarantee” Defense

Editor’s Note:  Bank Bryan Cave is going into its ninth year as one of the nation’s leading blogs on financial institution regulatory, M&A, securities, and litigation issues.  Here’s a recent post on Bryan Cave’s successful work for the California Bankers Association (“CBA”), headed up by Joseph Poppen of BC’s San Francisco office.

 

Bryan Cave LLP recently served as counsel for amicus curiae California Bankers Association (“CBA”) and helped score a victory in an important California appellate case of great interest to the banking industry, LSREF2 Clover Property 4 LLC v. Festival Retail Fund 1 357 N. Beverly Drive LP (Second District, California Court of Appeal case number B259937) (Link to the opinion is here).

The trial court had ruled that the guarantor of a commercial loan was excused from performance on the grounds that the guaranty was a “sham,” structured by the lender to circumvent California’s anti-deficiency laws.  The guarantor essentially argued that there was no legal separation between it and the borrower because it was the borrower’s “alter ego,” and as support they identified evidence that the two entities failed to observe basic corporate formalities.  According to the guarantor, it should be

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Madoff Continues On: Recent Tax Court Case Rules on Treatment of Madoff Account

Editor’s Note:  Our colleagues in Bryan Cave’s Private Client practice are on the cutting edge of tax matters, estate administration, challenging end-of-life matters, and other issues of estate and family law.  This area of law evolves at just about the speed of light.  Their leading blog, Life, Death, and Taxes demonstrates a commitment to thought leadership in this area, and we at The Bankruptcy Cave were excited to see this discussion of a recent Madoff-related ruling.  Kudos to Stacie Rottenstreich and Karin Barkhorn from Bryan Cave’s New York Private Client group for this interesting writeup.

In a recent Tax Court decision, Harry H. Falk, and Steven P. Heller, Co-Executors, v. Commissioner of the Internal Revenue, the United States Tax Court ruled that in the case of the Madoff Ponzi scheme, an estate which paid estate tax on Madoff assets which subsequently have become worthless can claim a theft deduction.

James Heller, a New York state decedent, died in January 2008 owning a 99% interest in James Heller Family, LLC (the “LLC”).  The only asset held by the LLC was an account with Bernard L. Madoff Investment Securities, LLC.  In November

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Proposed New Local Rules for the Southern District of New York

The United States Bankruptcy Court for the Southern District of New York recently announced proposed amendments to its local rules.  The proposed amendments will not take effect until December 1, 2016, but we could not wait to take a peek at the future of practice in the Southern District.  (And for those of you who are rules junkies, here and here are prior posts on FRBP changes applying to all courts, from earlier this year.)

The future looks largely like the present—do not expect wholesale changes or many new rules.  The most significant changes clarify procedures such as motions to redact identifying or confidential information and reorder the rules governing notices of presentment.  Comments will be accepted until November 14, 2016, so it is possible additional changes could be made.  Here are some of the most significant changes:

L.R. 1002-1(b) will be added, which will require, if practicable, advance notice to the clerk’s office and the U.S. Trustee of impending chapter 11 or chapter 15 filings and first day motions requiring immediate relief.

L.R. 2002-2 will be repealed, but it isn’t going away. See the note accompanying L.R. 9074-1(c) below.

L.R. 3011-1 will be added.  It requires all

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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

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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

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Defending A Preference Action – Can You Setoff Post-Petition Amounts Owed by the Debtor Against Your Preference Liability?

September 21, 2016

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All bankruptcy lawyers (and most long-suffering trade creditors) know that creditors who receive payments from a debtor within the “preference period” – 90 days before a voluntary bankruptcy case was filed, or 1 year if the creditor is an “insider” of the debtor – are at risk of lawsuit to return those payments to the bankruptcy estate. Pre-petition claims the creditor hold are no automatic defense.  However, the Bankruptcy Court for the District of Delaware recently ruled, as a matter of first impression in that Court, that an allowed post-petition claim of the creditor can be used to set off the creditor’s preference liability. See Official Comm. of Unsecured Creditors of Quantum Foods, LLC v. Tyson Foods, Inc. (In re Quantum Foods, LLC), 2016 WL 4011727 (Bankr. D. Del. Jul. 25, 2016).  Here is a copy of the case.

The background of the case is simple. The Unsecured Creditors Committee filed various preference actions.  In the Quantum Foods preference case, the Committee sought to avoid and recover over $13 million in pre-petition transfers to two related Defendants.  The Defendants claimed, among other defenses, a right to set off a previously allowed administrative expense claim for $2.6 million

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Stern Amendments to Bankruptcy Rules

September 19, 2016

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Stern Amendments to Bankruptcy Rules

September 19, 2016

Authored by: James Maloney

While it has taken five years of committee and court efforts, the “Stern Amendments” to the Federal Rules of Bankruptcy Procedure will become effective December 1, 2016.  These amendments will streamline litigant and court procedures in resolving subject matter jurisdiction matters as between district courts and bankruptcy courts.

The Bankruptcy Cave has followed many procedural issues since Stern v. Marshall.[1]/ Stern held certain claims designated by statute for final adjudication in bankruptcy court, are nonetheless required by the Constitution to proceed in an Article III district court (Stern post). Various Stern progeny has explored the role of parties’ consent to final adjudication in the bankruptcy court, the ability of the bankruptcy court to make findings of fact and conclusions of law for final determination by the district court, emerging local rule accommodations of jurisdictional uncertainty, and a special practitioner’s peril where a trial in district court is (oddly) governed by bankruptcy rules.  See our posts from the Bankruptcy Cave’s “Stern Series” on In re Fisher Island Invs., Inc., 778 F.3d 1172 (11th Cir. 2015), the sequence of Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) and Wellness Int’l Network, Ltd. v. Sharif,

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Involuntary Bankruptcy Primer Part I: Understanding the Oft Ignored Involuntary Bankruptcy Petition (with Bankruptcy Cave Embedded Briefs for Your Use!)

August 30, 2016

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Editor’s Note:  This is a new one for us at The Bankruptcy Cave.  We are starting a series of primers, covering a narrow range of law but with more depth than just “here’s a recent case.”  And also, we have our first edition of “The Bankruptcy Cave Embedded Briefs” – top quality briefs on a certain issue, feel free to download to your own form files or come back and grab ’em when you need ’em.  Let us know what you think – we are always trying to improve things around here for our readers.

 

Involuntary bankruptcy is an underused but potentially powerful tool in the Bankruptcy playbook.  Although the process to initiate an involuntary case is relatively straightforward (and has been largely unchanged for decades), the scarcity of involuntary petitions filed each year means few bankruptcy lawyers have any practical experience in this area of law.  In 2012 (the last year for which we have good data) just over 500 involuntary bankruptcy petitions were filed, representing but .04% of total bankruptcy filings.[1]

Initiating the Involuntary Case

An involuntary case is commenced by the filing of an involuntary bankruptcy petition under Chapter 7 or 11 of the

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