In our continuing series of posts on failed or closed restaurants, many clients have asked us to review the custom and practice and the law regarding guarantees and  good guy guarantees for restaurant leases. Most restaurants in New York are owned by a limited liability company (“LLC”) or a Subchapter S corporation. That entity will set up and run the restaurant and the LLC  or S corporation stock will be owned by an  individual. In negotiating the restaurant lease, all Landlords will require that the owner of the LLC  or the S corporation guarantee the lease.There are two types of lease guarantees in New York. A full or complete Guarantee for the payment of  rent or additional rent by the restaurant under the lease. Under this type of Guarantee, if a restaurant fails to makelease payments for 6 months  or any period of time and owes $50,000 for  rent and additional rent  under the lease and these monies are not paid by the restaurant, the Landlord can demand that the guarantor pay those monies and if payment is not made, the Landlord can  sue the individual that owns the restaurant/guarantor for that sum of money. This is an example of an unconditional or unlimited guarantee by the restaurant owner to the Landlord. The second type of guarantee is what is known as a “Good Guy Guarantee (“GGG”)”, which is a specialized type of guarantee which limits the payment  of the guarantor under  the restaurant lease, if certain conditions enumerated in the GGG are met.  If the restaurant performs those conditions, the guarantor is released from its  obligations under the Lease. An example is provided below. Example, many GGG require that the following conditions be performed by the restaurant in order for the GGG clause to come into effect and to limit the restaurant owners exposure to the Landlord for future rent. 1.  the restaurant  must be current on its payment of rent and additional rent, when the GGG sends a letter to the landlord indicating that the restaurant is closing, 2 . written notice must be given to the Landlord (as specified in the lease) regarding the date of the  closing of the restaurant a certain number of days in advance of the closing date  (usually 45 to 60 days), 3.the restaurant must be left in  “broom clean” condition and 4. keys for the restaurant must be delivered to the Landlord. Under this scenario, if all 4 conditions are satisfied, the guarantor is released from its guarantee under the Lease. However, the restaurant remains liable for the remaining rent and additional rent due under the Lease, unless the Landlord releases the restaurant from future rent (by the parties entering into a Lease Surrender Agreement) or the restaurant’s lease is subleased or assigned to a 3rd party in accordance with the terms of the Lease and  with the consent of the Landlord. As can be seen from the above examples, a GGG is a more limited form of guarantee. Under New York custom and practice, the guarantee whether it is a regular guarantee or a GGG can be incorporated into the terms of the lease,  but it must be signed and dated by the guarantor and the guarantor is usually required to give his or her social security number  and home address to the Landlord.The guarantee or good guy guarantee can also be its own  separate document  and it is usually two to five pages long.Before a restaurant closes, the lease and the guarantee, should be reviewed  by an experienced attorney to determine what conditions must be met. Any clients having questions regarding a closed or failed restaurant and lease guarantees or good guy guarantees should contact Jim Shenwick at 212-541-6224 or  email him at [email protected]. Jim Shenwick negotiates leases, practices bankruptcy law and represents failed or closed restaurants. 

This year's National Conference of Bankruptcy Judges featured a symposium on the role of equity under the Bankruptcy Code.   "Senators" Melissa Jacoby, Ken Klee and Rich Levin convened a mock hearing in which they questioned professors Diane Lourdes Dick, Bruce Markell, Laura Coordes  and Jay Westbrook about the role of equity.   Some of the themes they covered included the difference between equity and discretion, the public interest and whether the Bankruptcy Court is a court of equity.   A version of the symposium will be published in the American Bankruptcy Law Journal.Prof. Dick surveyed 51 bankruptcy judges to find their views on the role of equity.   She found that their answers fell into four clusters.  The first group said that bankruptcy courts have inherent equitable powers but they are largely supplanted by Code.  The second group was similar.  Banruptcy courts have inherent equitable powers which are supplanted by the Code, but they can still exercise discretion to level playing field.   The third group said that substantive discretion and equitable powers are one in the same.   The final group said that the Code yields to equitable powers when judges are given discretion.   The judges surveyed had a common belief that all federal judges possess equitable powers that serve to protect the integrity of the court.Prof. Markell discussed whether a bankruptcy court is a court of equity breaking it down to whether it is a court and whether it has equity powers.  He said that judges collectively constitute a court.  They also have inherent powers to do such things as setting court hours to more weighty concerns of how do they handle lawyers misbehaving.  He suggested giving bankruptcy judges the same criminal contempt powers which magistrates have.   He found three distinctions applicable to courts of equity and found some evidence that bankruptcy courts exercise them.   First, a court of equity applies principles exercised by chancery.  Section 541 tells courts that equitable interests are property of the estate.   In determining claims, bankruptcy courts may consider equitable defenses such as estoppel and undue influence. The second distinction is that courts of equity may generally decide matters fairly.  Sections 510(c) and 552(b) grant the power to reach a just and equitable result in certain specific circumstances.  Finally, courts of equity are empowered to make an exception to a general rule.  Bankruptcy courts have the power to correct ministerial mistakes and have the discretion to implement remedies not specified.Prof. Coordes said that we lack a clear understanding of the role of equity in bankruptcy.   The concepts of equity and discretion become muddled and intertwined.   Some academics want bankruptcy courts to have broad equity powers, while others say there is no such power.   What does equity mean?  Is it a mandate to do justice or reach the right result under the Code?   Proponents of bankruptcy courts exercising equity powers argue that a bankruptcy court must have equitable powers because bankruptcy is statutory and a statute can’t address every situation.   A court’s equitable powers are a means to account for means and purpose of bankruptcy code.  Section 105(a) allows the court to issue orders that are necessary or appropriate.  There are quitable powers to issue a necessary order.   However, those powers must be limited to service of the Bankruptcy Code. She also argued that we should distinguish equitable powers from discretion.   Discretion is the right to make a choice.   Equity is less limited.   Bankruptcy equity is not about doing justice but fulfilling provisions of the Bankruptcy Code in specific situations.    Judges should interpret the Code in a manner consistent with its purpose.   Prof. Jay Westbrook argued that equity should serve the public interest in bankruptcy and that this should be expressly stated in the Code.  He argued that equity is a vehicle for applying considerations of public interest, particularly in chapter 11 cases although this is subject to debate.  Prof.  Baird believes that chapter 11 is an invitation to negotiate.  He asked whether bankruptcy is merely that.  The values that bankruptcy serves include orderly resolution of cases and maximization of value, but beyond that, we don’t agree.   Should bankruptcy serve some kind of public interest?  Yes.  However, public interests should not overrule specific provisions of the code.  He said that the Code should specify when the public interest applies.   For example, section 552(b) expressly allows the court to make an exception to the general rule based on equitable reasons.  He said we should put on the table those elements of decisions that have to include public interests.  Prof Coordes asked who speaks for the values that bankruptcy code balances?  How are the threads to be incorporated?  The Code has numerous values that it is trying to serve.  Prof. Westbrook was asked how a judge could have the necessary information to evaluate public concern?   What do you do about fact that a judge is not administrative agency?   How would you encourage further implementation?   He answered that equity is underutilized because there is a view that there must be specific authorization in the Code.  He said that we should authorize judges to exercise judgment and break away from idea that the Code answers all by its plain meaning.  He suggested that judges be expressly told that they are authorized to consider the public interest, especially where we have given you broad direction.  When choosing among competing confirmable plans, the Code gives judges unlimited discretion.   The same is true when there are closely balanced bids.   If it is a close call, judges should consider factors such as the effects on employment.    Prof Dick said that her survey dispels the rumor of the freewheeling bankruptcy judge. The judges used terms such as cautious, caution, and careful to describe their use of equity.   In response, "Senator" Klee asked how valid this was given that only 14% of the judges responded.  She said that her results were typical for an online survey but that her respondents may have been the judges with the greatest interest in the topic.Prof. Coordes said that equity should be used interstitially and to correct mistakes. She said that   inherent powers are different from equitable powers.  Filling in the gaps in the statutory scheme is equity but it must be limited to serve the statute.  She also described section 105(a) as an  extension of the All Writs Act and affirmed that bankruptcy courts having gapfilling power.   Prof Markell was asked about a footnote in his article which said that equity can’t create substantive rights or be a roving commission to do equity.  He quoted Aristotle who said that equity is "a rectification of law when law falls short by reason of its universality."   He said that equity allows judges to modify remedies to achieve the powers of the Code such as granting relief nunc pro tunc.  He said that there are ways that courts have found means to accomplish purposes of Code.    However, he said that does not guarantee that decision will be correct, such as in the Jevic case.   "Senator" Levin asked Prof. Westbook what should the goals of chapter 11 be?   Should Congress put something in the Code to recognize public interest?  Prof. Westbrook answered that every judicial decision can incorporate the public interest. The public interest is set out in other federal statutes, such as those on labor, environmental and securities regulation.  He said that the core goal of bankruptcy is to maximize value and make distributions in an orderly fashion.  Beyond that, bankruptcy judges should take account of how bankruptcy intersects with other areas of the law.   "Senator" Klee noted that the judicial power is granted to life tenured judges and asked, what attributes of judicial power cannot be delegated to a bankruptcy judge?   Prof. Markell said to start with Stern and beyond that, the question is whether or not the law allows judges to consider equity.  For example, if a bankruptcy court is to decide an issue in the same manner as a non-bankruptcy court, such as considering equitable defenses to a proof of claim, then the Court may consider equitable matters to same extent.   Author's Note:   While I am reasonably sure that I captured the big themes in this discussion, I may have erred in some of the particulars.   Be sure to consult the upcoming issue of the American Bankruptcy Law Journal to get the definitive word.

One of the pleasures of attending the National Conference of Bankruptcy Judges is seeing good lawyers and judges being recognized for their contributions to the profession.   This year I attended three awards presentations.The Commercial Law League of America presented the Lawrence P. King Award to Eric Brunstad, Jr.  Mr. Brunstad is a skilled advocate who has argued ten cases to the Supreme Court.  A consummate over-achiever, he has an LLM and a JSD from Yale Law School.  A JSM is the equivalent of a Ph.D. in Law.  He has taught at Yale Law School, NYU School of Law, Harvard Law School and the Georgetown University Law Center.  In his acceptance speech, he acknowledged his debt to Lawrence King and many prior winners of the King Award, including Sen. Elizabeth Warren.   He said that he wanted to teach Secured Transactions at Yale and asked then-Prof. Warren what the best way to do that would be.   She said that the answer was to teach Secured Transactions at Harvard, which she helped him to do.   He said that it worked and that when he return to Yale, he got his own parking place and an assistant.He said that "bankruptcy courts are problem solving courts and they need their equity powers."   He also said that appellate advocates should always be ready to answer the "why" question.Judge Joan Feeney received the Inns of Court Bankruptcy Inn Alliance Distinguished Service Award. Until she retired in May, Feeney was the chief judge of the U.S. Bankruptcy Appellate Panel for the First Circuit in Boston. She was a U.S. bankruptcy judge for the district of Massachusetts since 1992, serving as chief judge from 2002 to 2006.She is vice president of the American College of Bankruptcy and a past president of NCBJ. “She cares about her colleagues, the lawyers who appear before her, her staff, and, most of all, the litigants who come before her,” says Robert J. Keach, Esquire, of Bernstein, Shur, Sawyer & Nelson PA in Portland, Maine. “She wants the honest debtors who come before her to get the relief they deserve and to have better futures.” Feeney was also a co-chair of the Massachusetts Bankruptcy Court’s pro bono committee.Educating both specialists and consumers about bankruptcy is one of Feeney’s passions. She is co-author of the two-volume Bankruptcy Law Manual and served as business manager and associate editor of the American Bankruptcy Law Journal, the nation’s most frequently cited specialty law review. She also co-authored a book for consumers called The Road Out of Debt.Feeney is also founder and co-chair of the M. Ellen Carpenter Financial Literacy Project, a joint initiative of the U.S. Bankruptcy Court of the District of Massachusetts and the Boston Bar Association. Designed to help prevent future bankruptcy filings by individuals, the initiative educates high school students about financial responsibility and money management. The final session takes place at the bankruptcy court.Judge Harlan "Cooter" Hale received the Norton Judicial Excellence Award from the American Bankruptcy Institute.   After working for a large firm, he and several other young lawyers started their own firm.   In 2002, he was appointed to the bench for the Northern District of Texas.   One of his professional highlights was presiding over the Vitro Chapter 15 case.    He has authored 160 opinions and was cited by the Supreme Court in the Jevic case.   According to his colleague Judge Stacey Jernigan, he is first in the building and always available to consult with and handle emergencies.   He has been an elder of his church for 30 years, teaches bankruptcy law and helped found a non-profit which helps abused women.Judge Hale has a great love for To Kill a Mockingbird.   He once wrote to Harper Lee and told her that Atticus Finch inspired his decision to become a lawyer.  To his surprise, Ms. Lee wrote back and told him how pleased she was to have impacted his life.  The framed letter hangs in his chambers.Judge Hale was not able to attend the ceremony in person but gave videotaped remarks.   He recounted the case of Mr. Wiggins, an elderly old African American man who appeared on a motion to extend the automatic stay.  Mr. Wiggins testified that during his first case his wife passed away and he suffered a stroke.  He asked the judge to give him a second chance.  Judge Hale told him that he was in the right place to receive a second chance.  Judge Hale said that he often thinks about people like Mr. Wiggins when he thinks about his job as a bankruptcy judge.

The 2019 National Conference of Bankruptcy Judges in Washington, D.C. celebrated the 40th anniversary of the Bankruptcy Code with a fast-paced history of the Code.  The historical segment featured Ken Klee and Rich Levin who helped to draft the bill as House staffers.    A Short History of the CodeThe impetus for a new bankruptcy law started with a North Dakota creditor who complained that he had to go to St. Louis to appeal to the 8th Circuit.   He complained to his Senator who sponsored a bill to create a bankruptcy commission in 1970.   The legislation percolated throughout the 1970s.    One of the big issues was whether to make bankruptcy judges Article III judges.   This was opposed by Chief Justice Burger.   After going back and forth multiple times, the Article III provision was stripped from the bill, resulting in problems down the road.   The drafting was a bipartisan process with Rich Levin representing the majority and Ken Klee the minority.   After the bill was passed by the House and Senate, it hit one last snag.  Tip O'Neill refused to allow the clerk of the House to send the bill to be signed by the president.   This was not because he opposed the bill but because O'Neill faced pressure to prevent a judge whose term was expiring on October 31, 1978 from being folded into the bill.   The bill finally made it to President Carter who signed it on November 6, 1978.   Thus, the Bankruptcy Code (represented in the presentation as an animated character named Code-y) was born.Asked what they wished they had changed about the bill, Ken Klee said that he wished that he had provided that the effect of rejecting an executory contract was to terminate the contract except in the case of intellectual property under section 365(n).  Levin said that he would have put in a forty year sunset provision so that the legislation would have to be re-examined.Code-y faced an Article III problem when the Supreme Court struck down the provisions of the Code giving bankruptcy judges authority to make final decisions on a broad range of issues in the Northern Pipeline case.  When Congress failed to act, the Supreme Court adopted interim rules which created the core/non-core dichotomy that we have operated under ever since.   Bankruptcy Judge Bob Martin of the Western District of Wisconsin refused to accept that the new rules solved the constitutional issue.   He refused to act as a judge other than to sign uncontested orders.   When a mandamus action was brought against him, the Justice Department and his local U.S. attorney declined to represent him.   The two District Judges sat en banc and granted the mandamus.  Then Judge Martin happily went back to being a bankruptcy judge.Article III (who also appeared as a character) resurfaced in 2011 when the Stern decision knocked out the ability of bankruptcy judges to enter final decisions in some core proceedings, such as counterclaims filed against claims filed in bankruptcy.    The voice of Article III spoke up and said that he had provided a warning that the Code's authority was questionable back in 1989 when the Granfinanciera decision held that defendants were entitled to a jury trial on a preference claim.    Article III, ever the kidder, said that when lawyers didn't get the message in Granfinanciera, he had to get a little more Stern.   However, balance to the system was restored with Arkison and Wellness International.   In 1986, Code-y was seven years old and agriculture was in  crisis.   Congress passed the Family Farmer Bankruptcy Act of 1986.  This statute added chapter 12 for family farmers and later family fisherman.   The two judges describing the act included plenty of bad puns, such as family farmer bankruptcy is a tough row to hoe.   Originally this was intended as a temporary fix which would expire in seven years.  However, in 2005 it was made permanent.  Many family farmers were having to file under chapter 11 because they could not meet the debt limits for chapter 12.   As a result, the limits were increased to $10 million under the Family Farmer Relief Act of 2019.In 1988, Code-y was nine years old when Congress passed legislation to protect the rights of licensees of intellectual property.  The Lubrizol decision from the Fourth Circuit held that rejection of a license of intellectual property also prohibited the licensee from continuing to use the technology.   This legislation added Section 365(n) to the Code.   34 years later, Justice Kagan ruled that Lubrizol was wrong all the time in the Tempnology case.   The Justice looked to the structure of the Code and saw that Section 365 was part of chapter 3, which did not include any avoidance provisions.In 1998, Congress removed the ability to discharge student loans except in the case of undue hardship.  Student loans are a major problem, having grown from $24 billion to $1.5 trillion dollars in recent years.  Sen. Dick Durbin (who was once a bankruptcy trustee) said that 44 million Americans owe student loan debt and that the average student graduates with $30,000 in debt.  He said that 8.4 million Americans over the age of 50 owe student loan debt and that many are retiring and dying without ever paying their student loans.  He cited a Wall Street Journal article which found that in 2017, only four reported cases found that a debtor could meet the undue hardship test.    Megan Bardoe of Public Counsel stated that her organization is looking for test cases to challenge the Brunner test for undue hardship.   In 2005, when Code-y was 26 years old, President Bush signed the Bankruptcy Abuse and Consumer Protection Act of 2005.   Judge Sheri Bluebond said that passage of this statute prompted the Great Bankruptcy Rush of 2005 (which incidentally was the name of an article that I wrote) when millions filed bankruptcy before the law took effect.   U.S. Rep. Katie Porter said that BAPCPA changed the Code from a protection device for families to an enforcement apparatus against abuse.  BAPCPA brought new paperwork and placed the bankruptcy courts in the position of administering tests to determine whether families qualied for relief.   Rep. Porter said that the Bankruptcy Code is there to backstop capitalism.  (What she did not point out was that BAPCPA largely exempted debtors with primarily business debts from its clutches).Sen. Chuck Grassley touted the Family Farmer Relief Act of 2019 and the Small Business Reorganization Act of 2019 as two laws that show what we can accomplish when we work together.  (This is a common theme.  Most bankruptcy reform legislation has been bipartisan).    Sen. Grassley said that the Small Business act will Increase debtors' ability to negotiate a successful reorganization and retain control of the business and will reduce their burdens and improve oversight.Bob Keach, a former president of the American Bankruptcy Institute, spoke about how the ABI's commissions to study chapter 11  and consumer bankruptcy acted as the Code's personal trainer.   He said that Chapter 11 worked well enough for large businesses, but doesn't work well for small and medium sizes.  Deadlines, lack of tools and onerous disclosure requirements complicate small business cases. He said that of 18,000 small businesses which filed in a recent year, only 27% confirmed a plan.   The new small business act will take effect on February 19, 2020.  It will streamline and provide new tools in two principal ways.   Only the debtor will be able to file a plan.   The absolute priority rule and Section 1129(a)(10) will not apply.   A plan will be fair and equitable if all of the business's projected disposable income for three to five years is devoted to the plan.   It will also change oversight.   There will be no creditors' committee and no separate disclosure statement.  A standing trustee will be appointed to see that cases stay on track and make disbursements.  The new statute imports the existing definition of a small business debtor from the Code which means that cases cannot exceed $2.6 million of debt.  While about half of chapter 11 cases may qualify, Mr. Keach sees next year's goal as increasing the debt limits to $10 million.Top 10 Supreme Court Cases of the Past 40 YearsFinally, no retrospective of the past 40 years would be complete without a look at the top 10 Supreme Court cases from the period.  Prof. Erwin Chemerinsky presented his top ten list.   The obvious top cases were Northern Pipeline in first place and Stern and Wellness tied for second.   This trio of cases helped define the constitutional authority of a bankruptcy judge.    Next Prof. Chemerinsky contrasted two cases on statutory interpretation.   Should courts interpret the Bankruptcy Code based on its purpose or its text?  It turns out that the Supreme Court has used both methods.  In third place was Marrama, which held that bankruptcy courts had the inherent power to deal with fraudulent debtors.  Case number 4 was Law v. Siegel which said that the court could not use its inherent powers to sanction a dishonest debtor by denying an exemption that he was entitled to under the Code.   The next theme he covered was federalism.   Number 5 was Butner v. United States which held that a creditor’s property rights are defined by state law unless the Bankruptcy Code provides otherwise.   In sixth place was BFP v. Resolution Trust.  This case overruled the so-called Durrett rule which said that a foreclosure sale which brought less than 70% of fair market value could be set aside as a fraudulent transfer.  BFP held that property sold at a regularly conducted foreclosure sale could not be overturned in bankruptcy.  Next up were  several procedural cases. Case #7 was Granfinanciera in 1989.   This case held that Congress could only eliminate the right to trial by jury for public rights matters.  Because a suit to recover a preference was simply an action to recover money, there was a right to a jury trial (unless waived by filing a proof of claim as found in Langenkamp).   What is a public right? Is it a suit brought by or against the United States or is it something more?  We are not sure.  Case number 8, Commodity Futures Trading Corp. v. Weintraub found that a Chapter 7 trustee can waive a corporation’s attorney-client privilege.   In ninth place was Bullard v.Hyde Park Savings Bank. Interlocutory orders may not be appealed without leave of court.   So when is an order final?   According to Bullard, an order denying confirmation of a chapter 13 plan was not a final order.    The final case, Milavetz, Gallup & Milavetz v. United States, decided whether the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 violated attorneys' First Amendment rights.  BAPCPA requires attorneys representing consumer debtor to identify themselves as Debt Relief Agencies and barred them from advising clients to take on more debt.  The Court found that requiring lawyers to identify as DR As was not compelled speech because BAPCPA defined them as Debt Relief Agencies.   The Court found that the prohibition on advising clients to incur debt only applied to incurring debt for a bad purpose and therefore did not violate attorneys' rights. Note:  I have mentioned a number of cases by their names.  If you would like the full citation of any of these decisions, please email me at [email protected].

The Top 3 Advantages of Filing for Chapter 7 Bankruptcy When you are in over your head in debt, you may feel like you don’t have any options other than to work yourself to the bone and pay everything you can to your creditors, hoping that you can scratch and crawl your way out of the hole you’re in. Bankruptcy gives you an option to get out of that hole and to put your life on firm footing once again. There are two types of bankruptcy: Chapter 7 and Chapter 13. However, Chapter 7 is what most people have in mind when they think about bankruptcy, and it is the type of bankruptcy that most people would choose if given the option. Take a look at the top 3 advantages of Chapter 7 bankruptcy Around Arizona and you’ll understand why most people prefer it: It Offers a “Clean Slate” Don’t you wish you could turn back time? You could go back to before you bought that car that ended up costing you so much in repairs. Or do you wish that you could just wave your hand and get a free pass after you’ve suffered some major setback, such as getting sick and running up a ton of medical bills? That’s kind of what a Chapter 7 bankruptcy does. If you qualify for Chapter 7 bankruptcy, all of your unsecured debts can be discharged. That means that you can get rid of credit card debt, medical debt, and debt from all those payday loans you took out trying to get on top of your problem (but only making it worse). You don’t pay any of it, and you’ll never hear from one of those creditors again asking you to pay! There are No Limits on Discharge You can qualify for Chapter 7 bankruptcy no matter how much unsecured debt you have. In Chapter 13 bankruptcy, there are debt limits, and if you exceed them, you don’t qualify to file. You can owe your credit cards $100,000 and still qualify for Chapter 7 bankruptcy. And if you are approved, you can have the entire amount discharged! Imagine what your life would be like if you could rid yourself of those debts. You Can Keep Your Money and Property In a Chapter 13 bankruptcy filing, you will be put on a repayment plan. All of your income and assets will be evaluated to determine what you can pay. In a Chapter 7 bankruptcy, that assessment happens at the beginning of your family. If it is determined that you are able to pay toward your debt, you will be required to do so before the remainder is discharged. However, once the bankruptcy is discharged, you will not be required to continue paying anything. All of your income and assets will remain yours. There are a few exceptions to this rule. If you come into a big inheritance, for example, within six months of your bankruptcy discharge, you may have to use some of that to pay your creditors. Your bankruptcy lawyer can help you understand the rules here if you are expected a big payout after your bankruptcy is expected to close. Filing for bankruptcy can help you get free of the debt that has come to overwhelm you, but filing for Chapter 7 bankruptcy can get you there faster. Your debts are discharged in as little as a few months, unlike a Chapter 13 bankruptcy in Mesa which you have to pay for three to five years. Talk with an experienced bankruptcy lawyer to learn whether bankruptcy is right for you and which option would be best. My AZ Lawyers can help you. We are a top bankruptcy law office serving clients in the Phoenix, Tucson, Glendale, and Mesa areas. If you think you may want to file for bankruptcy, we will help you learn more about the process, and we’ll review your finances to let you know how bankruptcy may help you. Our goal is to help you get the debt relief you need as quickly as you can give it. Call us today to talk with a bankruptcy lawyer and to learn more about your options for debt relief through Chapter 7 or Chapter 13 bankruptcy. My AZ Lawyers Mesa Location: 1731 West Baseline Rd., Suite #100 Mesa, AZ 85202 Office: (480) 448-9800 Glendale Location: 20325 N 51st Avenue Suite #134, Building 5 Glendale, AZ 85308 Office: (602) 509-0955 Tucson Location: 2 East Congress St., Suite #900-6A Tucson, AZ 85701 Office: (520) 441-1450 Avondale Location: 12725 W. Indian School Rd., Ste E, #101 Avondale, AZ 85392 The post The Top 3 Advantages of Filing for Chapter 7 Bankruptcy appeared first on My AZ Lawyers.

Student Loan Change from Forbes Magazine

  An important ruling on private student loans was issued by the 5th Circuit Court of Appeals in Crocker v Navient Sols., LLC (In re Crocker), 2019 U.S. App. LEXIS 31300, Case #18-20254 (5th Circuit 21 October 2019).   The case involved loans by two different individuals to pay education expenses1, and subsequent bankruptcies in Virginia and Texas from a subsidiary of SLM Corporation d/b/a Sallie Mae.  SLM is a for-profit public corporation whose loans are not part of any government loan program.  The loan was later transferred to the predecessor to Navient Credit Finance Corporation.  The lender continued collection efforts on both loans post-discharge.  After the discharges, the Texas debtor filed a complaint to determine that the debt was dischargeable and for damages for a discharge injunction.  The Virginia debtor then joined the suit which sought class action status. The bankruptcy court rejected the lender's argument that the Texas court could not enforce a Viriginia's court bankruptcy injunction, and held that the debts were dischargeable.  An appeal was certified directly to the 5th Circuit Court of Appeals.  The appellate court initially examined the ability of a bankruptcy court to enforce the §524 discharge from another district.  The court looked to the history of the statute, noting a subsequently-repealed provision providing for registration of an order of discharge in districts other than that where it was entered.  Also, since civil contempt is the normal sanction for violation of the injunction, and it is clear that the court against which a contempt is committed has exclusive jurisdiction to punish such contempt, the power to enforce an injunction should be similarly limited.  Even though the injunction arises from statute rather than judicial discretion, as the relief is founded in contempt, returning to the issuing bankruptcy court is required in order to uphold the respect for judicial process. The 5th Circuit was more supportive of the bankruptcy court's ruling as to the dischargeability of the student loans.  The court initially noted that all exceptions to discharge are to be narrowly interpreted to preserve the debtor's 'fresh start.'  The statutory language of §523(a)(8) provides:(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for--(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.11 U.S.C. §523(a)(8).  Subsection (A)(i) requires a defined role by a governmental unit or nonprofit institution.  Subsection (B) requires a qualified education loan, which in turn is limited to the cost of attendance at an eligible institution, ie one which is eligible to participate in a program under Title IV of the Higher Education Act.  The lender does not claim that this provision applies to the loans at issue.  Rather, Navient asserts that section (A)(ii) applies to these loans.  The court examined the language of the subsection applying the principle of noscitur a sociis, or the principle that statutory words are known by the company they keep.  Scholarships and stipends generally involve grants rather than loans.  This principle argues against Navient's broad definition of 'benefit' as including any advantage or profit gained from something.  Under Navient's definition, government loans covered by subsection (A)(i) and qualified education loans covered by subsection (B) would also be covered by subsection (A)(ii), rendering those subsections to serve little purpose.  The history of §523(a)(8) shows that a 1990 change in the statute was generally interpreted to create a new category of nondischargeable debt that excluded for-profit loans. The 2005 amendment replaced §523(a)(8) with a new subsection with subparts, part (B) of which provided for the nondischargeability of qualified education loans under §221(d)(1) of the Internal Revenue Code.  This amendment excluded for-profit loans from the nondischargeability clause.  The history does not support Navient's assertion that the 2005 amendment made all private student loans nondischargable.  The 5th Circuit concluded that §523(a)(8)(A)(ii) applies only to educational benefits that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions of the payments.  The benefits encompassed by the provision are limited to conditional payments with similarities to scholarships and stipends.  Debts such as the ones in this case, where the obligation to repay them is unconditional, are therefore dischargeable under that provision (unless they satisfy the requirements under §§523(a)(8)(A)(i) or 523(a)(8)(B).1 More specifically, the Texas debtor, Crocker, obtained a $15,000 loan for to fund his bar examination preparation.  Shahbazi, the Virginia debtor, obtained a $11,658.99 loan for tuition and expenses for his attendance at a technical school.↩Michael BarnettMichael Barnett, PA506 N Armenia Ave.Tampa, FL 33609-1703813 870-3100https://hillsboroughbankruptcy.com

Restaurants and Workouts with CreditorsMany readers of our blog, who read last week's post titled“Restaurant Closings in New York City and Bankruptcy”have asked us to do a post regarding workouts with creditorsafter the restaurant has closed.Let's review a typical fact pattern,  that we see regarding failed restaurants.The restaurant is owned by an LLC or a subchapter S corporation and the member’sinterest in the LLC or the stock in the S corporation are 100% owned by Mr. X.The restaurant closes and the following debts are due and owing:Suppliers or trade vendors are  owed $150,000The landlord is owed $75,000, which amount is subject to a “guaranty” or a “good guy guaranty” by Mr. X.$45,000 is owed for New York State sales tax.The FICA/Futa tax penalty for the employee component (trust fund money) is $30,000 andFormer employees of the restaurant are owed $20,000 im past due wages.For purposes of this example  the restaurant has elected to close and notfile for Chapter 7 or Chapter 11 bankruptcy.What should the restaurant owner (Mr X) do? Let’s analyze how each debtand how it should be treated.First, with respect to the suppliers or trade vendors, if those debts have not been guaranteedby Mr X. they do not have to be paid because they are the obligation of the restaurant.If the suppliers or vendors are not paid within 30 to 45 days of the restaurants closing,they can sue the restaurant and they will be able to obtain a judgment against the restaurant,but not against Mr. X.Second,  the debt to the landlord is an obligation  of the restaurant and of the guarantor, Mr X. If the landlord is not paid,the Landlord will sue the restaurant and Mr X. Since the restaurant is closed, it does not need to  be concerned about ajudgment from the Landlord, but the judgment against  Mr. X would need to be addressed thru a  workout with the landlordor by a bankruptcy filing by Mr. X. The debt to the former Landlord should be addressed by Mr. X after the payment or aworkout with New York State sales tax and the FICA/FUTA tax penalty, for reasons discussed below.Third, the $45,000 owed to New York State sales tax is a trust fund or a responsible person tax and it would notbe dischargeable in a bankruptcy by Mr. X and  an arrangement should be made to pay that tax through the saleof the restaurants furniture fixture & equipment or the collection of its accounts receivable, or from Mr. X’s savings.Fourth, the FICA/FUTA  $30,000 tax is a trust fund and similar to sales tax it would not be dischargeablein Mr. X’s bankruptcy filing and it should be paid or payment arrangements should be made with the IRS Fifth,  under New York State law  past due wages due to former employees are an obligation of the restaurant andMr X personally. If these wages are  not paid by Mr. X  the former employees can sue him and obtain a judgment,but the judgment will be dischargeable in a Chapter 7 bankruptcy filing by Mr. X.With  respect to the terms of a workout there are two ways to work out a payment plan with a creditor, one iswith a lump-sum payment and the other is a series of payments over time, otherwise known as an “installment agreement”or an “out of court settlement or workout”.A creditor will give a larger discount for a lump sum payment, than an installment payment. For example,if a creditor is owed $30,000, Mr. X may be able to negotiate a lump sum payment of $5,000 as a final and full payment,with a release from the creditor to Mr. X.In an installment payment arrangement Mr. X would agree to pay a creditor who is due $30,000, $10,000 overtime,in ten $1000 monthly installment payments.Restaurant owners with a failed or a closed restaurant should consult  with an experienced bankruptcy or in debtor-creditor attorneyas soon as possible in the process. Jim Shenwick, Esq.  can be contacted at 212-541-6224 or at [email protected]

Many readers of our blog, who read last week's post titled“Restaurant Closings in New York City and Bankruptcy”have asked us to do a post regarding workouts with creditors after the restaurant has closed.Let's review a typical fact pattern, that we see regarding failed restaurants. The restaurant is owned by an LLC or a subchapter S corporation and the member’s interest in the LLC or the stock in the S corporation are 100% owned by Mr. X. The restaurant closes and the following debts are due and owing: Suppliers or trade vendors are owed $150,000 The landlord is owed $75,000, which amount is subject to a “guaranty” or a “good guy guaranty” by Mr. X.$45,000 is owed for New York State sales tax. The FICA/FUTA tax penalty for the employee component (trust fund money) is $30,000 andFormer employees of the restaurant are owed $20,000 in past due wages.For purposes of this example the restaurant has elected to close and not file for Chapter 7 or Chapter 11 bankruptcy. What should the restaurant owner (Mr X) do? Let’s analyze how each debt and how it should be treated.First, with respect to the suppliers or trade vendors, if those debts have not been guaranteed by Mr X. they do not have to be paid because they are the obligation of the restaurant.  If the suppliers or vendors are not paid within 30 to 45 days of the restaurants closing, they can sue the restaurant and they will be able to obtain a judgment against the restaurant, but not against Mr. X. Second, the debt to the landlord is an obligation of the restaurant and of the guarantor, Mr X. If the landlord is not paid, the Landlord will sue the restaurant and Mr X. Since the restaurant is closed, it does not need to be concerned about a judgment from the Landlord, but the judgment against  Mr. X would need to be addressed thru a  workout with the landlord or by a bankruptcy filing by Mr. X. The debt to the former Landlord should be addressed by Mr. X after the payment or a workout with New York State sales tax and the FICA/FUTA tax penalty, for reasons discussed below.  Third, the $45,000 owed to New York State sales tax is a trust fund or a responsible person tax and it would not be dischargeable in a bankruptcy by Mr. X and  an arrangement should be made to pay that tax through the sale of the restaurants furniture fixture & equipment or the collection of its accounts receivable, or from Mr. X’s savings.Fourth, the FICA/FUTA $30,000 tax is a trust fund and similar to sales tax it would not be dischargeable in Mr. X’s bankruptcy filing and it should be paid, or payment arrangements should be made with the IRS Fifth, under New York State law past due wages due to former employees are an obligation of the restaurant and Mr X personally. If these wages are not paid by Mr. X the former employees can sue him and obtain a judgment, but the judgment will be dischargeable in a Chapter 7 bankruptcy filing by Mr. X. With  respect to the terms of a workout there are two ways to work out a payment plan with a creditor, one is with a lump-sum payment and the other is a series of payments over time, otherwise known as an “installment agreement” or an “out of court settlement or workout”. A creditor will give a larger discount for a lump sum payment, than an installment payment. For example, if a creditor is owed $30,000, Mr. X may be able to negotiate a lump sum payment of $5,000 as a final and full payment, with a release from the creditor to Mr. X. In an installment payment arrangement Mr. X would agree to pay a creditor who is due $30,000, $10,000 overtime, in ten $1000 monthly installment payments. Restaurant owners with a failed or a closed restaurant should consult with an experienced bankruptcy or in debtor-creditor attorney as soon as possible in the process. Jim Shenwick, Esq.  can be contacted at 212-541-6224 or at [email protected] 

The news for student loan borrowers in bankruptcy is usually so grim that even a small victory is cause to sit up and take notice.   The Fifth Circuit recently handed student loan debtors two small victories, ruling that dischargeability of student loans was not subject to arbitration and that bar exam loans could be discharged.  The cases are Case No. 18-20809, Stephanie Marie Henry v. Educational Financial Service (Matter of Stephanie Marie Henry)(Fifth Cir. 10/17/19) and Case No. 18-20254, Evan Brian Crocker v. Navient Solutions, LLC (Matter of Evan Brian Crocker)(Fifth Cir. 10/21/19).   The opinions can be found here and here.No Arbitration of Student Loan Discharge The Henry case is pretty straightforward.  Ms. Henry filed chapter 7 bankruptcy and received a discharge.  Later she sought a determination that the debt had been discharged.   Educational Financial Service, a division of Wells Fargo, moved to compel arbitration.   The bankruptcy court denied the motion and the Fifth Circuit affirmed.  The arbitration clause in question said that any "controversy or claim arising out of or related to this Note, or an alleged breach of this Note" shall be subject to arbitration.    The Fifth Circuit ruled thatBankruptcy courts may decline to enforce arbitration clauses when two requirements are met. First, the proceeding must adjudicate statutory rights conferred by the Bankruptcy Code and not the debtor’s prepetition legal or equitable rights. Second, bankruptcy courts may decline enforcement of arbitration agreements only if requiring arbitration would conflict with the purposes of the Bankruptcy Code. (cleaned up).Opinion, p. 5.    The Fifth Circuit found that a clause requiring arbitration of dischargeability met both requirements and rejected an argument that the intervening Supreme Court opinion in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) overruled prior Fifth Circuit precedent.  Thus, the debtor will be able to try her case in bankruptcy court.Bar Study Loans Dischargeable; No Nationwide Authority to Enforce DischargeThe Crocker case involved both a substantive question, whether loans made to study for the bar exam are dischargeable, and a procedural one, whether one court can enforce a discharge issued by another court.   The Fifth Circuit ruled that the loan was discharged but that the Court's ability to enforce the discharge ended at its own borders.Evan Crocker took out a $15,000 loan to study for the bar exam from SLM Corporation, d/b/a Sallie Mae, which subsequently assigned the loan to Navient.    Mr. Crocker filed bankruptcy in the Southern District of Texas.Michael Shahbazi obtained a loan for $11,658.99 from Sallie Mae to attend a technical school.  Mr. Shahbazi filed bankruptcy in the Eastern District of Virginia.Crocker and Shahbazi asked the bankruptcy court for the Southern District of Texas to certify a nationwide class of those who obtained private education loans from Navient or related companies to cover expenses at an institution not accredited under Title IV, received a discharge and were subject to collection efforts post-discharge. Navient moved for summary judgment that the bankruptcy court had no jurisdiction to interpret and enforce discharge orders entered by courts in other judicial districts and that the loans were non-dischargeable.  The bankruptcy court denied the motion.   It then authorized both an interlocutory appeal and a direct appeal to the Fifth Circuit.A.   No Nationwide Discharge Violation ClassThe Fifth Circuit followed the Second Circuit opinion in  Anderson v. Credit One Bank, N.A., (In re Anderson), 884 F.3d 382, 390–91 (2d Cir. 2018) to hold that only the court which issued the discharge injunction may enforce it.  We adopt the language of the Second Circuit that returning to the issuing bankruptcy court to enforce an injunction is required at least in order to uphold “respect for judicial process.”  The bankruptcy court erred in holding that it could address contempt for violations of injunctions arising from discharges by bankruptcy courts in other districts. Therefore, as to Shahbazi and at least those debtors whose discharges were entered by courts in other districts, the bankruptcy court in these proceedings has no authority to enforce the resulting injunction.Opinion, p. 16.   The court left open the issue of whether one bankruptcy judge has the power to enforce a discharge entered by another judge in the same district.The opinion does not address the question of whether the bankruptcy court could certify a nationwide class of debtors seeking a remedy other than enforcement of the discharge.   Several decisions from the Southern District have concluded that bankruptcy courts may certify nationwide class actions.   Adv. No. 16-3235, Katrina Jones v. Atlas Acquisitions, LLC (Bankr. S.D. Tex. 5/19/17);  Cano v. GMAC Mortg. Corp. (1n re Cano), 410 B.R. 506, 550 (Bankr. S.D. Tex. 2009).  However, both of these decisions relied the assumption that the Fifth Circuit implicitly endorsed nationwide class actions when it vacated an order certifying a nationwide class of debtors but did not dismiss the suit.  Bolin v. Sears, 231 F.2d 970 (5th Cir. 2000).    However, Bolin was a case seeking to enforce the discharge.  The Fifth Circuit has now said that a bankruptcy court may not certify a nationwide class of debtors seeking to enforce the discharge.  This means that the implication from Bolin is no longer good law.   However, it is unclear how this would apply to non-discharge injunction cases.B.  Bar Study Loans Can Be DischargedBecause Mr. Shahbazi received his discharge in Virginia, the Fifth Circuit did not consider whether his loan was dischargeable.  However, it did consider whether Crocker's bar study loan was dischargeable.  There are three types of student loans debts which may not be discharged: an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution (11 U.S.C. Sec. 523(a)(8)(i)an obligation to repay funds received as an educational benefit, scholarship, or stipend (11 U.S.C. Sec. 523(a)(8)(ii)any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual (11 U.S.C. Sec. 523(a)(8)(B).The Navient loan was a private loan.  Therefore, it did not fall within Sec. 523(a)(8)(i).   It was not a loan that was a "qualified education loan" because it was not made to attend a qualifying institution.  Therefore Sec. 523(a)(8)(B) did not apply.   That left the question of whether a private loan made to an individual to study for the bar exam constituted an education benefit, scholarship or stipend.  The Fifth Circuit said no.The Court's statutory analysis is quite lengthy.   However, an oversimplification is that of the three terms, scholarship and stipend have narrow meanings.  Navient argued that "educational benefit" could refer to any benefit that a person received in connection with their education.  The Fifth Circuit found that it did not make sense that one item in a list of otherwise narrow terms would be interpreted so expansively.  It also found that Navient's construction would essentially swallow the remainder of Sec. 523(a)(8) rendering it superfluous.   Thus, a private loan which is not a qualified education loan is a dischargeable debt.  Crocker's loan was a private loan.  It was not made to attend a qualifed institution and therefore was not a qualified education loan.  Therefore, it was discharged.  For a more expansive discussion of dischargeability of student loans, please see my prior article here.Disclosure:  Barron & Newburger represented Navient in the very early stages of the case but did not file the motion for summary judgment in question.Note on Style:  I have used the parenthetical "cleaned up" for the first time in referring to a citation where the quotation has been cleaned up to remove internal citations and other extraneous matters.   This convention is recommended in Jack Metzler, Cleaning Up Quotations, 18 Journal of Appellate Practice and Process 143 (2017).   I am going to continue using this convention in the blog although I am not sure whether I am ready to use it in submissions to the court yet.