If you are a struggling homeowner and have not yet found relief, you should pay close attention on Thursday, June 26th. The U.S. Treasury Secretary, Jacob J. Lew, will be announcing expanded programs to help homeowners and renters. Help for homeowners to stay in their homes and help for renters to obtain home loans in+ Read More The post Help For Homeowners Announcement From The Treasury Coming June 26th appeared first on David M. Siegel.

If you are in Chapter 13, the vehicle operating budget you are allowed will be too small. That’s (almost) a mathematical certainty.   Here’s why. The census bureau shows–no surprise–that people who are working spend on average double on transportation gasoline and maintenance than people who aren’t.    (For more, see this from the American […]The post Chapter 13: Your vehicle operating budget is too small. by Robert Weed appeared first on Robert Weed.

While the Fifth Circuit has yet to definitively address the quirky Pro-Snax opinion, a new decision provides some helpful guidance on recovering attorneys' fees in bankruptcy.    ASARCO, LLC v. Jordan Hyden Womble Culbreth & Holzer, P.C. (Matter of ASARCO, LLC), No. 12-40997 (5th Cir. 4/30/14).    You can read the opinion hereWhat HappenedASARCO was a copper mining, smelting and refining company.  It used to have a really big smokestack in my home town of El Paso, but that's another story. Two years before bankruptcy, ASARCO's parent, Americas Mining Corporation (AMC), directed ASARCO to transfer a controlling interest in Southern Copper Corporation to it.   After ASARCO filed chapter 11 in 2005, its attorneys, Baker Botts and Jordan Hyden Womble Culbreth & Holzer, filed a fraudulent transfer action against the parent company.    The attorneys did a really good job.   They recovered a judgment valued at between $7-$10 billion which, according to the Fifth Circuit "was the largest fraudulent transfer judgment in Chapter 11 history."    When ASARCO sought to monetize its judgment, AMC decided that it would be cheaper to fund the company's reorganization instead.   As a result, ASARCO emerged from bankruptcy after just  52 months with "little debt, $1.4 billion in cash, and the successful resolution of its environmental, asbestos and toxic tort claims."    You would think that everyone would be very happy with the work done by the attorneys.    The two firms applied for their lodestar fees plus a 20% enhancement as well as their expenses for preparing and litigating their fee applications.    ASARCO, which was now under the control of its parent, challenged the fees.   One discovery request sent to Baker Botts requested every document that the firm had produced during the bankruptcy case.   This resulted in production of 2,350 boxes of documents plus 189 GB of electronic data.    After a six day trial, the Bankruptcy Court awarded Baker Botts $113 million in fees plus an enhancement of $4.1 million for the work performed on the fraudulent conveyance case.   Jordan Hyden recovered $7 million in fees as well as an enhancement of $125,000.   The Court also awarded fees for defending the fee applications, which amounted to $5 million for Baker Botts and $15,000 for Jordan Hyden.   The District Court affirmed.The Fifth Circuit's RulingThe Fifth Circuit affirmed the enhancements but denied the fees for defending the fee applications.   Its analysis recapped the three-pronged approach adopted by the Court in In re Pilgrim's Pride Corp., 690 F.3d 650 (5th Cir. 2012) in which the Court held that fees should be determined under a combination of the lodestar approach, the factors specified in 11 U.S.C. Sec. 330(a) and the twelve factors from Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974).    The Court explained thatSection 330(a), the lodestar method, and the Johnson factors work in conjunction with each other to guide the court's discretion.Opinion. p. 6.   The Court further explained that the lodestar calculation (reasonable rates multiplied by a reasonable number of hours) provides the starting point for the analysis and that the lodestar amount can be adjusted up or down based upon the other factors.    The fact that the lodestar can be adjusted up provides the analytical basis for fee enhancements in "rare and extraordinary cases."   The Court rejected challenges from ASARCO that fee enhancements could never be allowed, that enhancements had to be approved by the client and that enhancements could only be allowed where there was a "plus factor" in addition to extraordinary results.   The Court also considered whether Baker Botts's fees were "below market" as found by the Bankruptcy Court.   The firm's blended rate was $353.98 per hour with partners charging $365-$800 per hour and associates billing $$195-$525 per hour.   The Court ruled that because "reasonable attorneys' fees in federal court have (not) been 'nationalized,'" it was improper to look at fees charged in other circuits.   Opinion, p. 10.   Nevertheless, the Court found that the Bankruptcy Court's finding was supported by enough evidence to survive clear error review.   Indeed, the rates charged by Baker Botts were less on a blended rate basis than any of the other firms in the case.   See In re ASARCO, LLC, 2011 Bankr. LEXIS 5487 (Bankr. S.D. Tex. 2011).However, the Court was not persuaded by the award of fees for defending the fee application.   The Court stated:We conclude that, correctly read, Section 330(a) does not authorize compensation for the costs counsel or professionals bear to defend their fee applications.Opinion, p. 13.   The Court based this ruling on the language of section 330(a), which expressly allows fees for preparing a fee application but not for defending one.  Parties in interest as well as the United States Trustee are entitled to receive notice and the opportunity for a hearing to question bankruptcy professional fees. Section 330(a)(1). Implicit in this procedure is the possibility of fee litigation. Nevertheless, Section 330 states twice, in both positive and negative terms paraphrased above, that professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration. Matter of Pro-Snax Distributors, Inc., 157 F.3d 414, 418 n.7 (5th Cir. 1998). The primary beneficiary of a professional fee application, of course, is the professional. While the debtor’s estate or its administration must have benefitted from the services rendered, the debtor’s estate, and therefore normally the creditors, bear the cost. This straightforward reading strongly suggests that fees for defense of a fee application are not compensable from the debtor’s estate. The Eleventh Circuit adopted this interpretation in a factually similar case, holding that “. . . the issue is whether the services rendered were reasonable and necessary to the administration of the estate. [internal citation omitted] The answer to this question is no. The subject of the [appeal and cross-appeal] was the fee to be paid to [the professional] for his services rendered in the administration of the estate. The appeals brought absolutely no benefit to the estate, the creditors, or the debtor.”(citation omitted).   Further supporting this interpretation is Section 330(a)(6), which limits potential professional fees in two ways. First, the specification of an award for “preparation of a fee application” is clearly different from authorizing fees for the defense of the application in a court hearing. Second, tailoring the award to the “level and skill reasonably required to prepare the application” emphasizes scrivener’s skills over other professional work. It is untenable to construe this language alone to encompass satellite litigation over a fee application. Had Congress intended compensation for professional fee applications to be allowable as “reasonable and necessary” under Section 330(a)(3)(C), there would have been no need to create the limits specified in subdivision (4). The broad reading of Section 330(a)(3)(C) urged by Baker Botts would render Section 330(a)(4) superfluous.Opinion, pp. 13-14.   The Court then explained how the American rule weighed against fees for defense.Because Congress designed fee shifting provisions in express derogation of the American Rule that each party to litigation bears its own costs, the losing party should bear the full costs of counsel for the winner. In bankruptcy, the equities are quite different. Both the debtor and creditors have enforceable rights, and there is a limited pool of assets to satisfy those rights and compensate court-approved professionals; in certain cases, moreover, professionals paid from the debtor’s estate represent competing interests. No side wears the black hat for administrative fee purposes. In the absence of explicit statutory guidance, requiring professionals to defend their fee applications as a cost of doing business is consistent with the reality of the bankruptcy process. The perverse incentives that could arise from paying the bankruptcy professionals to engage in satellite fee litigation are easy to conceive.  (emphasis added).Opinion, p. 16.The Court dismissed the argument that denying fees for defense of a fee application would encourage excessive fee litigation with the comment thatToo frequently, court-appointed counsel for debtor[’s] and the official creditor committees’ interests in a case, sharing the mutual goal of securing approval for their fees, enter into a conspiracy of silence with regard to contesting each other’s fee applications. (citation omitted).Opinion, p. 18.  Nevertheless, the Court allowed that fees for defense could be allowed where "an adverse party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons."   Opinion, p. 19.Thus, the final result was that Baker Botts was able to retain its enhancement of $4.1 million but lost its fees for defense of $5 million.   Jordan Hyden fared slightly better, retaining its enhancement of $125,000 while having $15,000 in cost of defense fees cut.   The Court tried to place this loss in context, stating:In this case, the huge cost of defending Baker Botts's core fees seems a drastic reduction in absolute terms, but it amounts to only about 4.4% of the core fee.Opinion, p. 17.   Thus, the message to Baker Botts from the appellate court was you did an amazing job, but you still have to pay the cost of proving that you did an amazing job.Take-Aways from the OpinionWhile this opinion addresses two very discrete issues, the extensive discussion contains some important lessons about attorneys' fees in bankruptcy.The accolades heaped upon Baker Botts are a measure of respect for the bankruptcy profession.   Even though Baker Botts plays in a more rarified world than the average bankruptcy practitioner, recognition for one bankruptcy professional is approval for the profession as a whole, just as incompetent, dishonest or mercenary behavior by bankruptcy lawyers tends to diminish it.    The Fifth Circuit has re-affirmed the unique amalgamation of three tests first announced in Pilgrim's Pride.   Professionals litigating attorneys' fees in the Fifth Circuit cannot simply rely on the language of the statute, but should consider whether the other two tests enhance or detract from their position.The Court's comments about national vs. regional fees reflect a compromise position between the efficiency of administration standard under the Bankruptcy Act and the "greed is good" mantra of Gordon Gecko.    While bankruptcy is no longer the poor stepsister of the legal practice, professionals cannot charge amounts exceeding the local prevailing rate simply because that is what they charge in some other, more expensive jurisdiction.The Fifth Circuit mentioned Pro-Snax, but not for its most infamous holding.   While the lower courts have struggled to implement the "tangible, identifiable and material benefit" standard, the Fifth Circuit has not revisited this language since its 1998 debut.   In this opinion, the Court mentioned one of Pro-Snax's less controversial statements that fees must be likely to benefit the estate or necessary to administration in order to be compensable.  This may be a signal from the Circuit that it will focus on the parts of the opinion that are uncontroversial while de-emphasizing the questionable language.     The Court recognized that challenging another professional's fees, while distasteful, is an important part of the process.   The Court's warning against the "conspiracy of silence" as well as its no black hats in fee litigation suggest that professional fees should be exposed to the same adversary process as other facts required to be determined by the courts.   While it may be easier to let the U.S. Trustee or the bankruptcy court do the heavy lifting, the parties will often have the most knowledge and incentive to develop the record.

Bankruptcy Relief Recently, I met with a man who was running a small business out of a storefront. Well it turned out that he was unable to survive at that current location. The problem was that he had a lease that expired five years into the future. So here he was with a business that+ Read More The post Not Everyone Qualifies For Chapter 7 Bankruptcy Relief appeared first on David M. Siegel.

Bankruptcy Avoidance Powers The chapter 7 bankruptcy trustee is the individual appointed by the Department of Justice to oversee the administration of your chapter 7 bankruptcy case. The trustee’s main duty is to examine the debtor under oath in a section 341 meeting of creditors and determine whether or not there are any assets to+ Read More The post Chapter 7 Trustee Has Bankruptcy Avoidance Powers appeared first on David M. Siegel.

Chicago Utilities You can file bankruptcy on your past-due utility bills. You may owe money to Comed and are close to a shut off. You may owe money to Nicor gas and are close to a shut off. You may owe money to AT&T and are already shut off. No matter what your situation, if+ Read More The post Filing Bankruptcy On Your Chicago Utilities appeared first on David M. Siegel.

Joint Bankruptcy Filing a joint bankruptcy makes perfect sense when you are married and both you and your spouse have either joint debt or separate debt. Since the means test is going to take into consideration your entire family income, you might as well try to eliminate your entire family debt in one fell swoop.+ Read More The post Filing A Joint Bankruptcy: When Does It Make Sense? appeared first on David M. Siegel.

Pre-Bankruptcy Planning It is best to file bankruptcy after you have had a chance to plan for your filing. Most people have thought long and hard about whether or not to file a bankruptcy case long in advance of the actual filing. It is true that some people bury their heads in the sand and+ Read More The post Smart, Pre-Bankruptcy Planning appeared first on David M. Siegel.

Most Americans don’t save enough money for retirement.   However, the Supreme Court recently dealt with the opposite situation—what happens when someone saves more than they need and their heirs receive the money (and then file bankruptcy).   This is the third time that the high court has considered what happens to retirement funds in bankruptcy.  In Patterson v. Shumate, 504 U.S. 753 (1992), the Court held that funds in an employer's pension plan were not property of the estate. In Rousey v. Jacobsen, 544 U.S. 320 (2005), the Court ruled that non-inherited IR As were included under the exemption for “a stock bonus, pension, profitsharing, annuity, or similar plan or contract” under 11 U.S.C. §522(d)(10)(E).  This time, the Court held that an inherited IRA does not constitute “retirement funds” under 11 U.S.C. §522(b)(3)(C) and 522(d)(12).    Clark v. Rameker, Trustee, No. 13-299 (6/12/14).    The opinion can be found here.   While the opinion denies the exemption under two subsections of the Bankruptcy Code, it does not address exemptions under state law.   As will be discussed below, this makes a big difference for Texas debtors.   What HappenedThe facts are pretty straightforward.   Ruth Heffron established a traditional IRA in 2000 and passed away the next year.   Her daughter and beneficiary, Heidi Heffron-Clark, received the IRA and elected to take monthly distributions from it.    In October 2010, she and her husband filed bankruptcy.    She claimed the $300,000 in the inherited IRA under both Wisconsin law and 11 U.S.C. §522(b)(3)(C).    The Bankruptcy Court ruled against her on both grounds.   In re Clark, 450 B.R. 858 (Bankr. W. D. Wisc. 2011).   The District Court reversed, but the Seventh Circuit reinstated the Bankruptcy Court’s ruling.  In re Clark, 714 F.3d 559 (7th Cir. 2013).    The Supreme Court granted cert to resolve the conflict between the Seventh Circuit and the Fifth Circuit’s decision in In re Chilton, 674 F.3d 486 (5th Cir. 2012).    Exemption Statutes and Types of IR AsRetirement accounts can be broken into two main categories:   employer plans and individual retirement accounts (IR As).   Employer plans are required to contain anti-alienation language which the Supreme Court previously held was sufficient to keep them from ever becoming property of the estate.IR As do not have the same anti-alienation protection.  As a result, they come into the bankruptcy estate and only come out if there is an applicable exemption statute.    Prior to 2005, IR As could be exempted under state law under 11 U.S.C. §522(b)(3)(A) or under 11 U.S.C. §522(d)(10) in the handful of states that permitted use of the federal exemptions.   Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress allowed Debtors electing state or federal exemptions to claim: retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.11 U.S.C. §522(b)(3)(C) and (d)(12).   The effect of this amendment was that all debtors could keep those funds so long as they were “retirement funds” and were in a fund or account exempt from taxation under the listed sections of the Internal Revenue Code.    IR As are governed by 26 U.S.C. §§408 and 408A.   As a result, they fall within the enumerated sections.    According to the Supreme Court, there are three types of IR As.   Under a conventional IRA, contributions are tax deductible, while under a Roth IRA, qualified distributions are tax free.    Both types of accounts are subject to a 10% penalty if funds are withdrawn prior to age 59 ½.     (Remember when you were a kid and you were quick to point out that you were 7 ½ as opposed to just 7?   With IR As, your half-birthday becomes important once again).   The third type of IRA is an inherited IRA.    If the beneficiary is the deceased’s spouse, they can roll the funds over into their own IRA account in which case, they become part of the conventional or Roth IRA.   However, if the beneficiary is not a spouse or if the spouse elects not to take the roll over, they can be treated as an inherited IRA.    Funds can be withdrawn from an inherited IRA at any time without penalty.   The beneficiary must either withdraw all of the funds within five years or elect to take minimum distributions on an annual basis.   The beneficiary cannot make additional contributions into the account.   The Supreme Court’s RulingEngaging in its role as dictionary of last resort, Justice Sonia Sotomayor’s opinion explored what it meant for funds to be “retirement funds.”   Because the relevant statutes do not define “retirement funds,” the court attempted to divine the term’s “ordinary meaning.”  Opinion, p. 4.Justice Sotomayor found three reasons why inherited IR As were not “retirement funds”:Three legal characteristics of inherited IR As lead us to conclude that funds held in such accounts are not objectively Three legal characteristics of inherited IR As lead us to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account. 26 U. S. C. §219(d)(4). Inherited IR As are thus unlike traditional and Roth IR As, both of which are quintessential “retirement funds.” For where inherited IR As categorically prohibit contributions, the entire purpose of traditional and Roth IR As is to provide tax incentives for accountholders to contribute regularly and over time to their retirement savings.Second, holders of inherited IR As are required to withdraw money from such accounts, no matter how many years they may be from retirement. Under the Tax Code, the beneficiary of an inherited IRA must either withdraw all of the funds in the IRA within five years after the year of the owner’s death or take minimum annual distributions every year. See §408(a)(6); §401(a)(9)(B); 26 CFR§1.408–8 (Q–1 and A–1(a) incorporating §1.401(a)(9)–3 (Q–1 and A–1(a))). Here, for example, petitioners elected to take yearly distributions from the inherited IRA; as a result, the account decreased in value from roughly$450,000 to less than $300,000 within 10 years. That the tax rules governing inherited IR As routinely lead to their diminution over time, regardless of their holders’ proximity to retirement, is hardly a feature one would expect of an account set aside for retirement.Finally, the holder of an inherited IRA may with draw the entire balance of the account at any time—and for any purpose—without penalty. Whereas a withdrawal from a traditional or Roth IRA prior to the age of 59½ triggers a 10 percent tax penalty subject to narrow exceptions, see n. 4, infra—a rule that encourages individuals to leave such funds untouched until retirement age—there is no similar limit on the holder of an inherited IRA. Funds held in inherited IR As accordingly constitute “a pot of money that can be freely used for current consumption,” 714 F. 3d., at 561, not funds objectively set aside for one’s retirement.Opinion, pp. 5-6.Because “plain meaning” analysis is never quite so plain as its proponents contend (especially if the case has made its way to the Supreme Court), the Court buttressed its ruling with policy considerations.    Among them, the purpose of an exemption is to allow the debtor to meet “essential needs.”   Encouraging (although not requiring) debtors to keep their funds in an IRA until after age 59 ½ sort of aligns with the goal of ensuring that debtors have sufficient funds to support themselves in their golden years and do not become a burden on society.   On the other hand, inherited IR As can be freely withdrawn and could be used on “a vacation home or sports car immediately after her bankruptcy proceedings are complete.”   Opinion, p. 7.   This conclusion seems a bit strained.   Funds in a conventional or Roth IRA could also be used for wild living once the bankruptcy was over; it’s just that there would be tax consequences if the person was under age 59 ½.   Further, in an age when the full retirement age is 67 and rising, being allowed to utilize fund at age 59 ½ means that they will likely be used as a stopgap to carry the person to retirement rather than funding actual retirement costs.Another factor which was not mentioned in the opinion was that the Debtors had $300,000 in the inherited IRA and had unsecured debts scheduled of $311,000.    As a result, the Debtors could have used the funds to settle with their creditors and likely had money left over.   Instead, they tried to file bankruptcy and keep it all.  While there is nothing wrong with using the tools made available by the law, avoiding a windfall to the Debtors at the expense of the creditors could have been rolling around in the back of the justices’ minds.Thus, inherited IR As cannot be retained in a bankruptcy proceeding—except for the cases in which they can.What It MeansThe Court’s opinion only addressed 11 U.S.C. §522(b)(3)(C) and (d)(12).    It did not address either exemptions under applicable state law.    In the Clark case, the Bankruptcy Court had ruled that Wisconsin law did not include an exemption for inherited IR As.   However, the relevant Texas statute provides:(a) In addition to the exemption prescribed by Section 42.001, a person's right to the assets held in or to receive payments, whether vested or not, under any stock bonus, pension, annuity, deferred compensation, profit-sharing, or similar plan, including a retirement plan for self-employed individuals, or a simplified employee pension plan, an individual retirement account or individual retirement annuity, including an inherited individual retirement account, individual retirement annuity, Roth IRA, or inherited Roth IRA, or a health savings account, and under any annuity or similar contract purchased with assets distributed from that type of plan or account, is exempt from attachment, execution, and seizure for the satisfaction of debts to the extent the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income tax on the person's interest is deferred until actual payment of benefits to the person under Section 223, 401(a), 403(a), 403(b), 408(a), 408A, 457(b), or 501(a), Internal Revenue Code of 1986, including a government plan or church plan described by Section 414(d) or (e), Internal Revenue Code of 1986. For purposes of this subsection, the interest of a person in a plan, annuity, account, or contract acquired by reason of the death of another person, whether as an owner, participant, beneficiary, survivor, coannuitant, heir, or legatee, is exempt to the same extent that the interest of the person from whom the plan, annuity, account, or contract was acquired was exempt on the date of the person's death. If this subsection is held invalid or preempted by federal law in whole or in part or in certain circumstances, the subsection remains in effect in all other respects to the maximum extent permitted by law. (emphasis added).Tex.Prop.Code §42.0021(a).    The language specifically including inherited IR As was added to the statute in 2013 after a Texas Bankruptcy Court concluded that inherited IR As were not exempt under state law.   In re Jarboe, 365 B.R. 717 (Bankr. S. D. Tex. 2007).  (Given the dysfunctional nature of the Texas legislature, Judge Bohm should be proud of the fact that his opinion prompted them to do something, even if it was to legislatively overrule his decision).  The fact that the Texas legislature amended the statute to add specific language about inherited IR As is pretty good evidence that they really intended these accounts to be exempt.     The practice tips for Texas debtors are: If you are in financial difficulty, leave the money in the inherited IRA.   If you pull it out, it may lose its protection.If you have an inherited IRA, always choose Texas state exemptions.If you don’t live in Texas, move here and wait two years (but please don't move to Austin as there are too many people here already).If you can settle with your creditors and then withdraw the funds, you might want to do so.   The best bankruptcy you can ever have is sometimes the one you don’t file.Hat-tip to Quincy Long with Quest IRA, Inc. who pointed out the new language in the Texas Property Code to me.

Bankruptcy Trustees If you live in Chicago and file a chapter 13 bankruptcy, the trustee appointed to your case is either going to be Marilyn Marshall or Tom Vaughn. Although each trustee follows the same bankruptcy laws and processes, each has a different standard or structure when it comes to confirming cases. In general, cases+ Read More The post Chapter 13 Bankruptcy Trustees In Chicago appeared first on David M. Siegel.