An opinion from San Antonio Bankruptcy Judge Leif Clark examines when a claim against a non-debtor can violate the automatic stay. The short answer is: when the creditor says he is doing it to collect from the debtor. The long answer requires an examination of the interplay between 11 U.S.C. Sec. 362(a)(1) and 362(b)(4). In re Reyes, No. 10-52366-C (Bankr. W.D. Tex. 4/20/11). You can read the opinion here.What HappenedThe Reyes case arises from a real estate transaction gone bad. Josie Jones sued real estate broker Liza Reyes in state court and recovered a judgment. The Court succinctly described what happened next:After the verdict was rendered, Jones and her lawyer, Robert Wilson, met with the debtor in a conference room at the courthouse. There, the debtor informed Wilson that they intended to file for bankruptcy. In response, Wilson, in the hearing of not only the debtor but also members of the debtorʼs family, told the debtor that he would “run them out of business by filing a complaint with the TREC (Texas Real Estate Commission) and close them down to get the money.” After the debtor filed for bankruptcy, Wilson, true to his word, filed a complaint in September 2010, on behalf of his client, with the TREC. The complaint took a number of months to prepare, and Wilson billed his client for the service. The TRECʼs procedures do not require a pre-investigation as a prerequisite to instituting such a complaint. Instead, the filing of the complaint itself necessitates an investigation by the Commission. If such an investigation results in a determination of wrongdoing on the part of the agent, and if a finding of damages is made, then the the TREC may make a monetary award to the complaining witness, and may subsequently seek reimbursement from the agent in the amount of the award. Wilson is well aware of these rules and procedures, this being one of his areas of practice.Opinion, pp. 1-2.The Debtors filed a Motion for Contempt against Jones and her attorney for violating the automatic stay by filing the Complaint with TREC. The Bankruptcy Court agreed with the Debtors and ruled that the stay had been violated.The Automatic Stay By the NumbersAmong other things, the automatic stay prohibits:(1) the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case;* * *(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.It is clear that the respondents commenced an administrative proceeding that could have been commenced before the commencement of the case and that the claim against the Debtor arose before the commencement of the case. More difficult is the question of whether it was a proceeding to recover a claim against the debtor.The Court answered this question in the affirmative, but only after an extensive discussion of whey the exception to the automatic stay of Sec. 362(b)(4) did not apply. Sec. 362(b)(4) allowsthe commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit's police and regulatory power . . .Notably, Sec. 362(b)(4) does not allow a private party to commence an action to enforce a governmental unit's police and regulatory power. Additionally, the Court found it significant that the TREC was required to act on the complaint.Here, by contrast, the filing of a complaint that stated the requisite grounds for an investigation commences such an investigation, without any independent discretion on the part of the Commission. The TREC had no independent choice in the matter once that complaint was filed. The institution of an action that necessarily required further prosecution was not the mere discharge of a public duty, . . . .Opinion, p. 8. Further, the Court found that Ms. Jones, who lives in California, was unlikely to be motivated by a desire to protect Texas residents from unethical real estate brokers, and was more likely to be motivated by collection of money.The Court ultimately found that the respondents were using the TREC as a vehicle to recover a claim against the debtor. Judge Clark stated:The filing of this complaint is more correctly viewed as Wilsonʼs following up on his threats -- and his hope to recover his judgment from the debtor indirectly, by way of the TREC. Viewed that way, Jonesʼ initiation of this complaint, carefully crafted by Wilson, is better understood as the commencement or continuation of a proceeding against the debtor to collect on a prepetition debt, in violation of section 362(a)(1). Opinion, p. 9.What Does It All Mean?Does collection of a judgment "from the debtor indirectly" violate the automatic stay? It is black letter law that the automatic stay does not protect non-debtors. Thus, absent the Sec. 1301 co-debtor stay, a creditor is free to proceed against a guarantor or other co-obligor after the debtor has filed bankruptcy. This raises the question of how the TREC is different from any other party who might be jointly or contingently liable on a debt of the debtor.The Court stated that "(t)he TREC . . . does have the authority to compel payment from the debtors" but did not fully explain that statement. Under Texas law, a person who recovers a judgment against a license or certificate holder for a prohibited practice, may apply for payment from the Texas Real Estate Recovery Trust Account. Tex. Occ. Code Sec. 1101.612. The TREC may revoke a license "if the commission makes a payment from the real estate recovery trust account to satisfy all or part of a judgment against the license or registration holder " and that "a person is not eligible for a license or certificate until the person has repaid in full the amount paid from the account for the person, plus interest at the legal rate." Tex. Occ. Code Sec. 1101.655(a) and (c). Thus, the Court is correct that the TREC could coerce repayment of amounts paid from the real estate recovery trust account by revoking the debtor's license until the amount was repaid. However, it is unclear that they could do so while the Debtor was in bankruptcy. Sec. 362(b)(4) allows a governmental unit to enforce a judgment "other than a money judgment." Thus, it seems likely that the TREC could not revoke the debtor's license for failure to repay the real estate recovery trust account. Further, Sec. 525(a) states that a governmental unit may not revoke a license based on failure to pay "a debt that is dischargeable in the case under this title."Sec. 525(a) may provide the glue that holds the court's opinion together. The TREC may revoke a license for failure to pay a nondischargeable debt. The Texas Occupations Code provides that in order to recover from the real estate recovery fund "the person shall verify to the commission that the person has made a good faith effort to protect the judgment from being discharged in bankruptcy." In this case, the respondents had filed a complaint to determine dischargeability but had not yet proceeded to trial. Had the respondents first obtained a nondischargeable judgment and then filed a complaint with TREC, there would have been no violation. The automatic stay terminates upon entry of the discharge and the discharge does not apply to nondischargeable debts. Here, the respondents jumped the gun. Rather than waiting until they had a nondischargeable judgment, they acted immediately to take actions which would have threatened the debtor's livelihood by threatening her license. It was a matter of timing rather than a matter of absolute prohibition. It was also really foolish for the lawyer to tell the debtor in the hearing of multiple witnesses that he would "run them out of business by filing a complaint with the TREC and close them down to get the money." Implications for Hot Check CasesIt is an open secret in Texas that County Attorneys' offices act as a collection agency for merchants who received dishonored checks. It is also quite clear that the automatic stay does not apply to "the commencement or continuation of a criminal action or proceeding against the debtor." 11 U.S.C. Sec. 362(b)(1). Therefore, it is clear that the County Attorney does not violate the automatic stay by filing hot check charges. However, under the logic of Reyes, it is intriguing to ask whether the merchant who initiates hot check charges as a debt collection device could be held liable for violating the stay. The difference between subsections (b)(1) and (b)(4) may provide the answer. Sec. 362(b)(4) is limited to actions by governmental actions, while 362(b)(1) is not. Thus, if hot check charges are criminal actions, a private party may initiate hot check charges without violating the stay. They only way around that would be to say that hot check charges are not legitimate criminal actions at all, but are really debt collection actions in substance. Unfortunately, telling a state what it can and cannot criminalize probably runs afoul of the Constitution.

Way back in 1986, Judge A. Jay Cristol denied his own sua sponte motion to dismiss a chapter 7 bankruptcy case in verse. In re Love, 61 B.R. 558 (Bankr. S.D. Fl. 1986). Some 20 years later, he penned another poetic opinion, this time finding that he was not required to sua sponte dismiss a Debtor's case for failure to file the required paperwork. In re Riddle, No. 06-11313 (Bankr. S.D. Fl. 7/17/06). Although the opinion is five years old, it mysteriously appeared upon my desk today without explanation.For your reading pleasure, I present to you the verse of Judge Cristol:I do not like dismissal automatic,It seems to me to be traumatic.I do not like it in this case,I do not like it any place.As a judge I am most keento understand, What does it mean?How can any person knowwhat the docket does not show?What is the clue on the 46th day?Is the case still here, or gone away?And if a debtor did not dowhat the Code had told him toand no concerned party knew it,Still the Code says the debtor blew it.Well that is what it seems to say:the debtor's case is then "Oy vay!"This kind of law is symptomaticof something very problematic.For if the Trustee does not knowthen which way should the trustee go?Should the trustee's view prismaticcontinue to search the debtor's atticand collect debtors' assets in his fistfor distribution in a case that stands dismissed?After a dismissal automaticwould this not be a bit erratic?The poor trustee cannot knowthe docket does not dismissal show.What's a poor trustee to do -except perhaps to say, "Boo hoo!"And if the case goes on as normaland debtor gets a discharge formal,what if a year later some fanaticclaims the case was dismissed automatic?Was there a case, or wasn't there one?How do you undo what's been done?Debtor's property is gone as if by a thief,and Debtor is stripped but gets no relief.I do not like dismissal automatic.On this point I am emphatic!I do not wish to be dramatic,but I can not endure this static.Something more in 521 is neededfor dismissal automatic to be heeded.Dismissal automatic is not understood.For all concerned this is not good.Before this problem gets too oldit would be good if we were told:What does automatic dismissal mean?And by what means can it been seen?Are we only left to guess?Oh please Congress, fix this mess!Until it's fixed what should I do?How can I explain this mess to you?If the Code required an old fashioned order,that would create a legal border,with complying debtors' cases defendedand 521 violators' cases ended,from the unknown status of dismissal automatic,to the certainty of a status charismatic.The dismissal automatic problem would be gone,and debtors, trustees and courts could move on.As to this case, how should I proceed?Review of the record is warranted, indeed.A very careful record review,tells this Court what it should do.Was this case dismissed automatic?It definitely was NOT and that's emphatic.

EL MIRAGE, Ariz. — The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery. All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead. Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months. “It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.” Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy. Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one. Before the housing implosion, the inflow and outflow figures were typically one-to-one. The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm. “These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.” A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings. But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once. Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike. “My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?” The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale. “If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.” The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months. Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks. “Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.” Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property. Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer. The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking. “If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”

In law school, students cope with concepts of subject matter jurisdiction, personal jurisdiction and stating a cause of action in civil procedure class. When they move on to bankruptcy class, they must try to make sense of the constitutionality of delegating jurisdiction to an Article I court when considering the Marathon Pipeline case. These are not easy issues to get your head around. Judge Craig Gargotta must have felt like he was writing a law school exam when faced with motions to dismiss in an adversary proceeding. Roberts, Trustee v. J. Howard Bass & Associates, Inc., et al, Adv. No. 10-1101 (Bankr. W.D. Tex. 2/15/11). You can find the opinion here. Introduction James H. Bass filed chapter 7 bankruptcy on June 3, 2009. The creditors included two judgment creditors holding claims of $5.5 million (including one that had been found to be non-dischargeable in a prior filing). Filing bankruptcy proved to be a mistake, since the court denied the debtor’s discharge and the trustee launched an adversary proceeding against nine Bass-related defendants seeking to recover assets. The defendants sought to make the adversary proceeding go away with motions to dismiss for failure to state a cause of action and for lack of jurisdiction. Among their more creative arguments was that the bankruptcy court lacked jurisdiction to hear the case because the bankruptcy jurisdiction scheme was unconstitutional. Have We Been Working Under a Constitutionally Defective System? In 1982, the Supreme Court found that Congress had “impermissibly removed most, if not all, of the ‘essential attributes of the judicial power’ from the Article III district court, and has vested those attributes in a non-Art. III adjunct.” Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 87 (1982). However, the defendants cited other language not actually found in the opinion for the proposition that “Congress could not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review.” Citing non-existent quotes from the Supreme Court is not a good way to impress the Bankruptcy Court. The defendants also argued that 28 U.S. C. §157, which referred bankruptcy matters to the bankruptcy courts was unconstitutional for the reason that it was an impermissible delegation of power to an Article I court. The Court noted that the argument would have had some merit—if it had been made in 1982. If this is where history ended, Defendants would be correct in stating that the bankruptcy code is unconstitutional. However, Defendants’ argument ignores approximately 30 years of subsequent history. In 1984, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA). One of the major changes, meant to remedy the constitutional challenges of Marathon, was 28 U.S.C. §157(b)(1) . . . . This statutory language gave the bankruptcy courts the same broad jurisdiction as the 1978 system, but it forbade the bankruptcy courts from rendering final judgments in cases that were only “related to” the bankruptcy case. Opinion, p. 8. In 1987, the Fifth Circuit found the revised jurisdictional grant to be constitutional in In re Wood, 825 F.2d 90 (5th Cir. 1987). The Supreme Court cited favorably to Wood in Celotex Corp. v. Edwards, 514 U.S. 300 (1995). Not wishing to overrule the Fifth Circuit and the Supreme Court, Judge Gargotta found the jurisdictional scheme to be constitutional. Jurisdictional to the Core? Having found jurisdiction, the Court had to find whether it had core jurisdiction. The claims asserted by the trustee included substantive consolidation, alter-ego and declaratory judgment. Rights created by the Bankruptcy Code constitute core proceedings. Substantive consolidation arises from section 105. As a result, it is a claim created by the Bankruptcy Code and thus a core proceeding. Alter-ego posed a more difficult question because these claims arose under state law. However, §157(b)(3) states that the fact that a claim arises under state law is not dispositive in determining core status. Because the alter ego claims would bring assets into the estate, they would have a direct effect on the liquidation of the assets of the estate under 28 U.S.C. §157(b)(2)(O). The declaratory judgment claims arose under the Bankruptcy Code and thus were core proceedings. Jury Trial The next argument raised by the Defendants was that they were entitled to a jury trial and that the Bankruptcy Court could not conduct one absent consent. Although Judge Gargotta went through several pages of serious discussion, the results can be summarized as: 1) there is not constitutional right to a jury trial in an equitable action; and 2) substantive consolidation and alter ego are equitable claims. Although Judge Gargotta went through several pages of serious discussion, the results can be summarized as: 1) there is not constitutional right to a jury trial in an equitable action; and 2) substantive consolidation and alter ego are equitable claims. Does Texas Law Allow A Reverse Veil-Piercing Claim Against An Entity That Is Not Owned by the Debtor? Traditional veil-piercing seeks to hold the shareholder liable for the debts of the corporation. Reverse veil-piercing is more exotic and seeks to hold a corporation liable for debts of an individual. However, in this case, the individual was not a shareholder of the corporations. Would Texas law allow reverse veil-piercing in this situation? Judge Gargotta relied on The Cadle Co. v. Brunswick Homes, LLC, 379 B.R. 284 (Bankr. N.D. Tex. 2007) for the proposition that while ownership is traditionally a requirement for reverse veil piercing, the doctrine could also be extended to de facto ownership. Because the trustee’s complaint alleged that the debtor sought to disguise his actual control of the companies, the trustee stated a cause of action. Can You Do Reverse Veil-Piercing on a Cayman Corporation? One of the defendants was a Cayman Islands corporation. The defendants argued that reverse veil-piercing was not available under Cayman law. The ever-scholarly Judge Gargotta noted that the Cayman Islands generally follow British law and that the United Kingdom has recognized veil piercing for over 100 years, from Saloman vs. Saloman & Co. [1897] A.C. 22 to Adams v. Cape Industries [1990] Ch 433; 2 WLR 657; [1991] 1 All ER 929; [1990] BCC 786 Sealy 66. Thus, the trustee stated a cause of action against the Cayman corporation. Personal Jurisdiction over the Cayman Corporation The Cayman defendant argued that no state or federal statute allowed service on it and that it transacts no business in the U.S. and only owns assets in the Cayman Islands. The Court found that the Texas long arm statute allows service to the fullest extent provided by the Constitution. This requires minimum contacts and that exercising jurisdiction is consistent with “traditional notions of fair play and substantial justice.” The Court found that if the Cayman corporation was found to be the alter ego of the debtor, then the court would have jurisdiction over it. As a result, the court found that it had jurisdiction to determine whether the Cayman corporation was the alter ego of the debtor. This poses an interesting conundrum. If the Cayman entity is not the debtor’s alter ego, then the Court may not exercise jurisdiction over it. However, to determine whether the court has jurisdiction, it must exercise its jurisdiction. Thus, the Cayman Islands entity must appear regardless of whether there is jurisdiction. Perhaps another way to approach the problem would have been to find that the Cayman entity had minimum contacts with the United States in that it was formed with money from a United States entity and its control persons were all residents of the United States. Substantive Consolidation Finally, the Defendants argued that the Bankruptcy Court could not grant substantive consolidation and that substantive consolidation between a debtor and a non-debtor was improper. The argument against the applicability of substantive consolidation was unlikely to succeed given the fact that the Court had a recent opinion approving use of substantive consolidation. In re Introgen Therapeutics, Inc. 429 B.R. 570 (Bankr. W.D. Tex. 2010). The Court was similarly unreceptive to the argument that a nondebtor could never be substantively consolidated with a debtor. While the defendants quoted from a Fifth Circuit opinion, they left out the words “under these facts.” Those words were pretty important because in Peoples State Bank v. GE Capital Corp. (In re Ark-La-Tex Timber Co.), 482 F.3d 319 (5th Cir. 2007), the debtor believed that its purchase of the ownership interest in two other entities automatically effected a substantive consolidation. The Court found that if the Trustee was successful in proving alter ego that the assets of the two non-debtor entities would be property of the estate and substantive consolidation would be moot. As a result, the Court determined that it would reserve judgment on the substantive consolidation claim. Conclusion After working through twenty-one pages of discussion, the Court concluded: Having gone through the facts of the case and considered the evidence submitted by the parties, this Court finds that (1) this Court and the current bankruptcy system are constitutional; (2) Plaintiff sufficiently pled a complaint for alter-ego liability that survives the motions to dismiss; (3) this Court can exercise personal jurisdiction over Esperada for the purposes of discovery; and (4) substantive consolidation in general is permitted in the Fifth Circuit, but the issue of whether it is appropriate in this case will be reserved for later determination after discovery and a trial on the merits. For these reasons, Defendant‟s Motions to Dismiss (docket nos. 66-74) are DENIED. Opinion, p. 21. The lesson to be learned here is that the Bankruptcy Court is fully up to the challenge of sorting through difficult procedural and jurisdictional issues. However, when raising difficult procedural and jurisdictional issues, it is important to accurately quote the cases. Class dismissed.

BY Albert Amateau U.S. Bankruptcy Judge Cecilia Morris approved the sale of St. Vincent’s Hospital’s Greenwich Village campus last week in a deal allowing Rudin Management to develop luxury residential condos and North Shore-Long Island Jewish Health System to operate a comprehensive care center with a 24-hour emergency department. The ruling came in a packed courtroom on Thurs., April 7, almost one year after New York City’s last Catholic hospital filed for bankruptcy and ended its 161 years of serving the neighborhood. In a joint statement, Michael Dowling, North Shore-L.I.J. chief executive officer, and Bill Rudin, chairman of Rudin Management, said they were “especially pleased that the judge confirmed what we’ve been hearing from residents, business owners and community leaders—the historic agreement reached last month by St. Vincent’s, North Shore-L.I.J. and the Rudin family is a great deal for the community and would ensure an innovative return of comprehensive healthcare to the neighborhood.” Dowling and Rudin added, “We look forward to securing the necessary approvals from city and state officials and working closely with the community, so that we can restore high-quality healthcare on the West Side by 2013.” Judge Morris delivered her decision after the two-and-a-half-hour hearing on Thursday morning. “I realize how sad it was to close St. Vincent’s,” she said. “It has been hanging over our heads for a year,” she added, noting that she has heard pleas for alternatives intended to save the full-service, acute-care hospital. But she ruled there was no likelihood that alternatives would be found to improve on the Rudin-North Shore-L.I.J. proposal. “The court must not blindly follow the most vocal interest group but must find the likelihood of a proposal that would lead to the plan for the liquidation of the Chapter 11,” she said, referring to the type of bankruptcy sought by St. Vincent’s trustees. She overruled a recently filed objection by James Shenwick, an attorney representing former City Councilmember Alan Gerson and others; Gerson’s group had sought a 45-day adjournment in hopes of nailing down a better proposal than Rudin’s $260 million for St. Vincent’s creditors and North Shore-L.I.J.’s $100 million (plus another $10 million from Rudin) to convert the former hospital’s O’Toole Building into a 24/7 emergency medical department and ambulatory surgery center. “For my clients, this is a matter of life and death,” said Shenwick at one point last Wednesday, drawing applause from the public and prompting Morris to warn that she would clear the courtroom if there were further demonstrations. Shenwick told the court that Jim Partreich, a principal in the Pinetree Group, a real estate brokerage firm, has been talking to potential investors. The attorney added that the National Football League’s Retired Players Association wanted to be a partner in a hospital that could serve its members. But Shenwick did not specify who the other investors were. Neither did he mention the name of any “major academic medical center,” despite assurances by the alternative plan’s supporters that one or more were interested. Gerson, who was at the April 7 hearing but did not testify, submitted an affidavit saying that unnamed medical centers and developers had told him they did not submit proposals because they believed the Rudin proposal was a “done deal” and that pursuing their interest would antagonize parties, “which could inflict economic retribution.” The former councilmember’s affidavit concluded with Gerson saying, “I believe there is a reasonable probability that, if given an extension, I and fellow objectors could work with the community, government officials and potential medical centers and development participants to come up with a plan which will both provide both a greater payment to creditors and better meet community needs.” But Morris rejected the argument and also overruled another proposal for a 45-day adjournment sought by Arthur Schwartz, attorney for the tenants’ association of the Robert Fulton Houses, a New York City Housing Authority development in Chelsea. Schwartz is associated with the Gerson group in seeking an alternative to the Rudin proposal, but he did not join in the Gerson group’s objection because he was representing his Fulton tenants clients in a separate objection. Schwartz told the April 7 hearing that he was disturbed both by the lack of details in the North Shore-L.I.J. proposal and by the lack of a formal bidding process for the sale negotiated by Rudin and North Shore-L.I.J. with St. Vincent’s creditors. He called for the adjournment in order to “make sure there is an arm’s-length transaction” that would allow other bidders to offer more money than Rudin and provide a full-service, acute-care hospital for the community. Morris, however, said that negotiated, private sales of debtors’ assets are not unusual in bankruptcy cases if they are the result of sound business judgment. She also said that although the New York State Constitution requires the state to provide healthcare for low-income residents of Fulton Houses, it does not mean that a facility has to be on the shuttered St. Vincent’s campus. Yetta Kurland, attorney for the Coalition for a New Village Hospital, also called for an adjournment, saying that the proposed North Shore-L.I.J. free-standing emergency department did not meet the neighborhood’s healthcare requirements. Kurland also faulted the privately negotiated aspect of the deal. But her pleas did not move the judge to grant a delay in the case. Morris dismissed all moves to delay the sale. She said that Schwartz’s State Supreme Court lawsuit demanding that the state build a full-service hospital as a successor to St. Vincent’s “could take years.” She also said she doubted that Gerson’s group could raise a financially credible challenge to the Rudin-North Shore-L.I.J. proposal. Kenneth Eckstein, attorney for St. Vincent’s, opposed any delay, saying, “Every month we don’t close costs, the estate is assessed $1.2 million in interest and carrying charges.” Stephen Bodder, attorney for St. Vincent’s unsecured creditors, said the proposed deal had the unanimous approval of creditors. In approving the sale, Morris cited the fact that Rudin’s offer included a $22 million cash down payment. In addition, Morris said, the fact that Rudin’s offer was not contingent on city zoning or state Department of Heath approvals was an important reason for her decision. She noted that the current deal was a successor to Rudin’s 2007 contract to buy St. Vincent’s east campus. That deal, which included Rudin’s right to buy the property for 15 years, was canceled with the hospital’s bankruptcy filing last year. As of last week, there were 18 medical tenants in the O’Toole Building, at 12th St. and Seventh Ave., on a month-to-month basis. Eight have agreed to leave by July 31, and the rest will meet with St. Vincent’s on May 19 in an effort to resolve their issues, according to a court-approved agreement.Copyright 2011 Community Media LLC. All rights reserved.

By LYNNLEY BROWNING DIVORCED homeowners wrangling with the task of removing a former spouse’s name from the mortgage after buying out his or her equity stake in the marital house may think that refinancing is the only choice. There is another, little-known option that can avoid refinancing and its costs, which generally run 3 to 6 percent of the outstanding loan principal, according to LendingTree. You simply ask your lender to remove the former spouse’s name, leaving the loan note in your name only. The problem is that not all lenders or mortgage servicers offer this option, known as release of liability. The lenders and servicers that do will most likely run a separate credit check on you — requiring, for example, that you meet minimum credit scores (typically from Fannie Mae, the giant government buyer of loans), and ensuring that you are current with the monthly mortgage payments. They may also require that any investors in the loan, after it is sold off, agree to the deal. And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option. “This is a common and often messy business,” said Jack Guttentag, a mortgage expert and emeritus finance professor at the Wharton School of Business at the University of Pennsylvania. “Lenders seldom have a reason to take a co-borrower’s name off the note.” But, he added, if a homeowner can prove that he or she can afford the payments and meet the required credit criteria — typically those of the investor in the loan — then release of liability may work. Neil B. Garfinkel, a real estate and banking lawyer at Abrams Garfinkel Margolis Bergson in New York, says the lender “will require the borrower to prove that the borrower is able to support the monthly payments without the co-borrower spouse,” typically through monthly bank statements, annual tax returns and investment statements. Having the name removed protects the credit of both parties, actually. If the former spouse failed to pay other debts, a lien could be placed on the home, and if you were delinquent on the mortgage payments, your former spouse’s credit could be hurt. Most divorce settlements stipulate one of two outcomes for marital property. Either the house must be sold, or the person wanting to keep the property must buy out the other’s share, usually within months of the date of the settlement, and get the other party’s name off the mortgage — either through refinancing or a release of liability — typically within a year. Under the second option, the former spouse signs a quit-claim deed at the divorce settlement, relinquishing his or her claim to the property. But while that action takes the former spouse off the house’s title and leaves it in one name only, it does nothing to remove his or her name from the actual mortgage. Lenders or servicers typically charge $300 to $1,000 to execute a release of liability and require the property owner to pay an additional, nonrefundable application fee, typically $250 to $500. The process can take from 30 to 90 days, mortgage experts say. One mortgage servicer, PHH Mortgage of Mount Laurel, N.J., requires that a homeowner with a loan sold to Fannie Mae have a minimum FICO credit score of 620 and a debt-to-income ratio of 50 percent or below (the ratio measures the amount of gross monthly income that goes to paying off all debts). Still, a lender or servicer “generally has no obligation to release one of the borrowers,” Mr. Garfinkel said. But Mr. Guttentag says homeowners may have one point of leverage. He suggested that qualified borrowers not accorded the release they seek tell their servicer or lender that unless a release of liability can be executed, the borrower will refinance the mortgage — at another lender. “In such cases,” he said, “the servicer might agree to do it.”Copyright 2011 The New York Times Company. All rights reserved.

You know that nothing good can come from an opinion which begins like this:This is a case about an affluent debtor who sought to manipulate bankruptcy procedures to accomplish what the Code prohibits--the elimination of all of her credit card debts despite her obvious ability to repay those debts over time. The debtor, Diane Davis, obtained confirmation of a plan in which she proposed to pay her credit card debts in full. The debtor subsequently objected to every claim filed by her creditors based on their alleged failure to attach sufficient documents to their proofs of claim. The debtor withdrew several objections after the creditors responded. The Court has before it the debtor's request for a default order sustaining the remaining objections.In re Diane Davis, No. 09-42865 (Bankr. E. D. Tex.3/31/11). p. 1. You can find the opinion here.The Davis case is one of a debtor who tried to follow the letter but not the spirit of the law. The debtor was an above median income debtor who would not qualify for relief under chapter 7. She filed under chapter 13 but tried to avoid paying any of her unsecured debts. She scheduled all of her unsecured debts as disputed and then objected to every claim filed. If the creditor responded, she withdrew her objection. Since most of the creditors did not respond, she thought that she was home free. However, the court had other ideas.A Few FactsThe Debtor was a single woman with gross monthly wages of $10,428 and disposable income of $3,923.92. The only debts she was delinquent upon were credit cards. She scheduled eight creditors with debts totaling $81,564. Every debt was listed as disputed with the notation "Debtor listed the balance shown on last statement; debtor not presently able to determine if balance is correct and is uncertain if trade name is correct legal creditor." The debtor filed a plan proposing to pay $3,190 to the chapter 13 trustee for 60 months. Twelve creditors filed proofs of claim totaling$147,400.68. Because the plan proposed to pay $190,400 on claims which were less than this amount, no creditors objected to the plan and it was confirmed. Then the debtor objected to every claim. The objections asserted that the creditors had not attached sufficient documentation to the claim and that the debtor would withdraw the objection if presented with adequate documentation. The debtor withdrew her objections to five claims after the creditors filed responses. However, the debtor sought default orders on the remaining seven claims. One of the claims that the debtor sought a default on was from Neiman Marcus. Neiman Marcus amended its claim to add documentation but did not file a response. The debtor's statement of financial affairs revealed that the debtor had been making payments on this claim prior to bankruptcy.The court conducted several hearings on the claims objections. While the debtor was present at one hearing, she did not testify. Debtor's counsel offered a brief on why the claims should be denied but never presented any substantive grounds why the debtor did not owe the debts.Can the Debtor Deny the Claims of the Non-Responding Creditors?The Court's answer was "no." Failure to attach supporting documentation, without more, is not a sufficient ground for denying a claim. Judge Rhoades stated:If an objection to a claim is raised, Section 502(b) provides that the court "shall allow the claim in such amount, except to the extent that" a grounds for disallowance provided by Section 502(b)(1)-(9) applies. (citation omitted). Thus, the Code requires us to overrule a claim objection that does not comply with Section 502(b)--even if the claimant does not appear to raise the issue.Opinion, p. 11. Thus, the mere fact that the creditor failed to attach sufficient documentation to the claim and then failed to respond to the claims objection was not grounds for denying the claim.Not only that, the court found that the claims did "substantially" conform to Bankruptcy Rule 3001 such that they were entitled to prima facie validity. Because the debtor did not produce evidence sufficient to rebut the prima facie validity of the claims, the creditor had no duty to respond.An Interesting TwistWhile Judge Rhoades found that the objections should be denied, she also raised the possibility that the debtor was asking for something she really didn't want. The discharge in a chapter 13 case is different than in a chapter 7 case. (citation omitted). In a chapter 13 case, upon completion of plan payments, a debtor generally is discharged of all debts "provided for by the plan or disallowed under section 502" of the Code. (citation omitted). Section 1328(a) does not, by its terms, discharge a chapter 13 debtor of her obligation to repay claims denied solely under Bankruptcy Rule 3001.Opinion, p. 15. Thus, had the debtor been successful in her non-substantive objections, she would not have discharged the debts.The Ethical Obligations of the Debtor's CounselThe Court was not amused as shown by the subheading "The Ethical Obligations of the Debtor's Counsel." The Court noted that filing the schedules and objecting to the claims, debtor's counsel deliberately chose to (i) ignore the debtor's personal knowledge,and (ii) conduct no independent investigation prior to filing the debtor's bankruptcy schedules and claim objections."Opinion, p. 21. The Court went on to state:It appears to the Court that the debtor and her counsel were motivated by the off-chance that the claimants would not respond to the objections and, consequently, that this Court would sustain the objections without substantive review. 'An off-chance does not satisfy [Bankruptcy] Rule [9011].' (citation omitted). 'This approach of throwing it against the wall and seeing what sticks is precisely the sort of conduct [Bankrutpcy Rule 9011] seeks to counter. (citations omitted). Opinion, pp.21-22. The Debtor's Obligation to Act in Good FaithThe Court was not any more impressed with the debtor's conduct. Regardless of the advice the debtor may have received from her counsel regarding the claims allowance process, she has an obligation to the Court to act in good faith. To confirm a chapter 13 plan, the bankruptcy court must find, among other elements, that 'the plan has been proposed in good faith.' (citation omitted). . . Good faith in this context is not an esoteric legal concept that only lawyers and judges can understand. The question is whether the totality of the circumstances indicates that the plan is unreasonable or that the debtor is attempting to abuse the spirit of the Code. (citation omitted).Opinion, pp. 22-23. The Bottom LineThe Court overruled the claims objections, vacated the order confirming the plan, gave the debtor 30 days to file a new plan and scheduled a hearing to determine whether debtor's counsel violated Rule 9011.What It MeansThe chapter 13 bargain is about paying creditors in return for a discharge. The debtor had enough disposable income to pay all of the filed claims in less than sixty months. This would have been a good deal because the debtor would have been able to repay the debts without interest. However, the debtor tried to take a shortcut and eliminate all of her claims on a defect of form. The Court was right to be concerned about the good faith of this practice.

Yesterday, the U.S. Bankruptcy Court for the Southern District of New York approved the sale of the Manhattan campus of St. Vincent's Catholic Medical Centers to the Rudin real estate family and the North Shore-LIJ Health System.We represented an alternative purchaser group (comprised of former New York City Councilmember Alan J. Gerson, attorney Dudley Gaffin and Dr. Robert Adelman) that objected to the sale. Please read articles about the sale in the Washington Square Journal and Crain's New York Business.

By HANNAH SELIGSONSMALL-BUSINESS owners know it is cash flow or die. While the recession officially ended in June 2009, many companies are still reeling. Credit can be hard to come by, and profits have not completely bounced back. On top of that, many customers are taking longer than ever to pay their bills.Exhibit A is Cisco Systems, one of the largest technology companies in the world, which announced last year that it would wait a full 60 days to pay its small-business suppliers — mostly because it had found that that was what other big companies were doing.So how does a small business get paid in a tough economy without hiring a collections agency or alienating its clients? Better yet, how does it avoid ending up with a stack of unpaid invoices in the first place?Judging from the experiences of the small-business owners interviewed for this guide, it is part art and part science.DO YOUR DUE DILIGENCE It used to be that credit reports were expensive and only for big companies with large budgets. Not anymore.Ron Phelps, commercial credit manager at Boulevard Tire Center, a tire distributor with 26 locations in Florida, pays $99 a month for Pulse, a service offered through Cortera, , an online business credit reporting system, that keeps tabs on his clients. Last December, Cortera’s monitoring system noted that there was a large federal tax lien on one of Mr. Phelps’s clients, a small trucking company. He cut off the company’s credit line.“That very same day,” he said, “we decided just to make them a cash customer, because we were concerned about their ability to pay.”Cortera also offers a free service that collects and analyzes payment histories on more than 20 million businesses. Think of it as Yelp for business credit — instead of reviewing restaurants and stores, its community gives feedback on how promptly a company pays.“We are helping small businesses tell the world that this person is a deadbeat,” said Alex Cote, vice president for marketing for Cortera. (There are other services, including Dun & Bradstreet, that will assess the financial strength of a company.)SET YOUR TERMS (WITH A SMILE) Diane Nicosia manages and coordinates major construction and design projects through her company, D. E. Nicosia & Associates, which is based in New Rochelle, N.Y. “I’m in charge of the budget and have to make sure vendors, architects and engineers get paid,” Ms. Nicosia said. “What I’ve learned is that you have to negotiate these days.”On a recent project involving 45,000 square feet of office space in a Midtown Manhattan office tower, a construction company said it would back out of the deal after it found that it would take 90 days to get paid by Ms. Nicosia’s client, a Fortune 100 financial services and manufacturing firm. Ms. Nicosia met with her client’s senior management and found that the payment timetable was not set in stone; there was room to broker a schedule that could keep the construction company from walking.“Most people don’t think to challenge the payment schedule,” she said, “but we have to step up as small-business owners and say, ‘This is my living.’ ”What Ms. Nicosia learned through this negotiation process, which she said was very amicable, was that there are often options: “All they have to do is push a little button that says pay in 10, 30 or 60 days, and that gets your invoice in a queue, so I got my vendor paid faster by working with the right people in the company.”GET THE PAPERWORK RIGHT Is your invoice perfect? Did you fill out all the forms (even the ones you may not know about)? Companies do not need much of an excuse, if any, to delay your invoice. So make sure not one piece of information is missing.Do you know whether the invoice needs a purchase order number? Not having this number can leave invoices lingering in accounts-payable purgatory, and it is unlikely that accounts payable will call to tell you.Is your invoice formatted correctly? Some companies accept invoices only in the form of a PDF. If you are a new vendor, did you fill out a new vendor form? Many companies require these forms to process a first-time payment (but do not always make that known).KNOW WHEN TO LOSE A CLIENT If customers do fall behind, when do you decide to cut them off? And what do you do if it is a customer you think you cannot afford to lose?At Boulevard Tire, delinquent accounts are placed in one of two buckets — 30 days overdue and 60 days overdue.“We look at those lists long and hard and ask ourselves,” Mr. Phelps said, “is this someone I want to immediately put on credit hold? Or is there something salvageable here? Are they a first-time offender?”There are, he said, no hard and fast rules. “It’s all about the dynamics,” he said. “For example, if we have a customer who is in dire straits, and they appear to be making an effort to pay, we might continue working with them.”Still, the economics may ultimately dictate the decision. As Mr. Phelps pointed out, if your company has a 10 percent profit margin and you lose $10,000 on an account, that is an additional $100,000 in revenue that your company has to find.DON’T RELY ON THE POST OFFICE To avoid having someone in the accounting department tell you that “the check is in the mail,” push for direct deposit or electronic transfer. That way, you can get paid exactly on the 45th or 60th day. There are also services available from banks that will allow checks to be faxed and scanned, with the money deposited into your account the same day.Consider accepting credit cards or PayPal. Yes, there is a fee, depending on which card or service you use, but the cash comes almost instantly.“Some credit card companies pay their merchants on the following day,” said George A. Cloutier, founder of American Management Services, a financial turnaround firm. “And in a climate where cash is so tight, that’s often worth the fee.”LET THEM KNOW IT’S IMPORTANT Rachel Lawrence oversees invoicing and bill collection at Bright Power, an energy efficiency company based in Manhattan. She was trying to collect from a property management firm that was 30 days late on a $25,000 invoice.“They kept giving me this excuse that they had changed accounting systems, which I think can be a delay tactic,” she said. “It got to the point where I really had to make it clear that I wanted payment, so I offered to physically pick up the check.”Ms. Lawrence gave the property management company dates and times she would be available to make the 30-minute trip to its office in Midtown Manhattan. The firm agreed to have the check ready. “When you say this is important enough to me that I will go out of my way,” she said, “I think people respond.”OFFER A DISCOUNT Mr. Phelps said he does not like to reward clients for not paying, but that in certain cases extending a discount on the condition that the debt be paid immediately in cash or a cashier’s check can make the money appear.“We’d rather have something than nothing and save ourselves the time and effort of going to court,” he said, “but we probably wouldn’t enter into a credit relationship with that company in the future.”And do not be afraid to give a 10 percent discount, said Mr. Cloutier: “For 1 or 2 percent, it’s probably not worth it to the person who owes the money, particularly if they are short on cash.”Copyright 2011 The New York Times Company. All rights reserved.

Offers of Judgment can be a handy device for shifting the risk of paying court costs in litigation. However, as a pair of recent opinions from Judge Leif Clark demonstrate, they can be tricky to pull off successfully. Eastman v. Baker Recovery Services, Adv. No. 08-5055-C (Bankr. W.D. Tex. 12/28/10 and 1/31/11). You can find the opinions here and here. The Offer of Judgment Rule Federal Rule of Bankruptcy Procedure 7068 incorporates Federal Rule of Civil Procedure 68, which states: Rule 68. Offer of Judgment (a) Making an Offer; Judgment on an Accepted Offer. More than 14 days before the trial begins, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service. The clerk must then enter judgment. (b) Unaccepted Offer. An unaccepted offer is considered withdrawn, but it does not preclude a later offer. Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs. (c) Offer After Liability Is Determined. When one party's liability to another has been determined but the extent of liability remains to be determined by further proceedings, the party held liable may make an offer of judgment. It must be served within a reasonable time — but at least 14 days — before a hearing to determine the extent of liability. (d) Paying Costs After an Unaccepted Offer. If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made. The rule is designed to encourage parties to make serious settlement offers early in the proceedings to avoid running up costs. If a defendant makes a reasonable offer and it is accepted, the case is over. On the other hand, if the defendant makes an offer which is not accepted and the ultimate judgment is “not more favorable than the unaccepted offer” the plaintiff must pay the defendant’s costs incurred after the offer was made. The Eastman Case Eastman was a particularly ugly discharge violation case. I have written about the underlying case before here. The defendants made an offer of judgment for $5,000.00 on February 27, 2009. After trial, the Court awarded $1,000.00 in statutory damages under the FDCPA plus attorney’s fees. The defendants objected to the plaintiff’s request for attorney’s fees based on the offer of judgment. The Court rejected the defendant’s argument, finding that the offer of judgment was not “not more favorable than the unaccepted offer.” The rule thus provides that the plaintiff must pay a defendantʼs fees if the judgment rendered fails to exceed the amount of the offer in compromise. In this case, the judgment consists of (a) the actual damages suffered, consisting of attorneysʼ fees incurred by the Plaintiff in order to enforce the discharge injunction and (b) the reasonable expenses incurred by the Plaintiff in recovering those actual damages, consisting of attorneysʼ fees incurred in prosecuting the litigation in order to obtain that recovery. (citation omitted). Thus, “costs” in the context of the rule includes the reasonable attorneysʼ fees incurred by the plaintiff in enforcing a civil contempt action, per settled case law. “[T]he judgment finally obtained must include not only the verdict of the jury but also the costs actually awarded by the court for the period that preceded the offer.” (citation omitted). The offer in this case was made well after the Plaintiff had incurred reasonable fees for the preparation of the complaint, preparing a response to a motion to dismiss, and preparing a response to a motion for summary judgment. In addition, discovery had already taken place. The offer made was for $5,000, and was filed of record on February 27, 2009. By that point, the Plaintiff had already incurred $3,900 in fees by Alex Katzman (litigation counsel), and $4,150 in fees by Rob Eichelbaum (bankruptcy counsel) by February 27, 2009. Over $9,000 in fees were incurred by Mr. Eichelbaum from late 2007 through the end of 2008. $3,000 in fees was incurred just to convince the Defendants to withdraw the offending judgment -- and that only after the Defendants tried to use that judgment to extract a payment from the Plaintiff. Thus, the judgment, including the costs incurred to that point in time exceeded the offer in compromise. The Defendants are not entitled to recover their costs from Plaintiff under Rule 68(d). Opinion on 12/28/10, pp. 8-9. Thus, in order to have been successful, the Offer of Judgment should have offered $5,000 plus costs incurred to date. Because the offer was for a flat $5,000.00 and the attorney’s fees incurred exceeded that amount, the offer did not meet the requirements of the rule. Undeterred, the defendants moved for reconsideration on the basis that they had previously made an offer to settle in March 2008. The Court noted that this offer was made prior to the commencement of the litigation. The Court cited the Wright & Miller treatise for the proposition that an offer of judgment can only be made by a party defending against a claim. If litigation has not been brought, then the offer to settle is not an offer of judgment. A Successful Offer of Judgment Case While Eastman shows how not to make an offer of judgment, Judge Letitia Paul’s opinion in Smith v. Radoff, 2006 Bankr. LEXIS 2412 (Bankr. S.D. Tex. 2006), is an illustration of a successful use of Rule 7068. In that case, a judgment creditor obtained appointment of a receiver for the debtor’s assets some sixteen years after entry of the discharge. The receiver withdrew $44,475.79 from the debtor’s bank account. Upon being sued, the quick-thinking defendants made separate offers of judgment to return the funds and to pay interest, costs and attorney’s fees. The plaintiff refused the offer and proceeded to trial. At trial, the Court found that the defendants testified credibly that they were not aware of the bankruptcy discharge and had difficulty verifying it due to the age of the case (it was filed in 1987) and the debtor’s common surname. The Court awarded interest on the seized funds at the federal judgment rate. Although the plaintiff requested attorney’s fees of $71,357.50, the court only awarded fees of $12,000.00, finding that the plaintiff had failed to mitigate damages. The Court denied all other relief to the plaintiff. The Court then found that because the judgment was not more favorable than the offer of judgment, that the defendants were entitled to recover their costs. In subsequent proceedings, the Court awarded attorney’s fees to each of the defendants in an amount exceeding the plaintiff’s recovery. As a result, when the final judgment was entered, the plaintiff owed a small amount to the defendants. The case settled after an appeal was filed. More on Attorney’s Fees While both the Eastman and Smith cases found that attorney’s fees were included within the definition of costs, this is not always the case. In Marek v. Chesny, 473 U.S. 1 (1985), the Supreme Court held that attorney’s fees constitute costs whenever the underlying substantive ground for relief defines them as costs. The Advisory Committee notes to Federal Rule 54(d) listed 35 statutes which allow recovery of costs, of which at least eleven included attorney’s fees within the definition of costs. The Civil Rights Attorney’s Fees Awards Act of 1976, which was the governing statute in the Marek case, allowed attorney’s fees “as part of the costs.” As a result, the Supreme Court found that attorney’s fees could be awarded under Rule 68. The Supreme Court’s ruling means that awards of attorney’s fees as costs under Rule 68 may be dependent upon small variations in language. For example, 28 U.S.C. §1927 allows a court to award “excess costs, expenses, and attorney’s fees.” Since costs and attorney’s fees are listed as separate items in the statute, attorney’s fees would likely not constitute costs in that context. In Eastman, Judge Clark found that “’costs’ in the context of the rules, includes the reasonable attorney’s fees incurred by the plaintiff in enforcing a civil contempt action, per settled case law.” Opinion 12/28/10, p. 9. Unfortunately, Judge Clark did not cite to the settled case law. However, in Chambers v. NASCO, Inc., 501 U.S. 32 (1991), the Supreme Court stated that “a court's discretion to determine ‘the degree of punishment for contempt’ permits the court to impose as part of the fine attorney's fees representing the entire cost of the litigation.” While the Supreme Court was not using the term “cost” in the narrow sense of costs of court under Rule 68, this may provide some support for the proposition. A Final Quirk As if the law on Offers of Judgment were not difficult enough, there is a line of cases which hold that an Offer of Judgment will not result in cost shifting in a case where the defendant is the prevailing party. In re LMP Shoal Creek, LLC, 2007 Bankr. LEXIS 4659 (Bankr. W.D. Tex. 2007); In re Security Funding, Inc., 234 B.R. 398 (Bankr. E.D. Tenn. 1999). Rule 68(d) refers to “the judgment that the offeree finally obtains.” These cases hold that if the plaintiff does not recover a judgment, that Rule 68 would not apply. This appears to be a strange result, since a damage award of $1 would allow cost shifting, but a take nothing judgment would not.