Is Your Debtor Corporate or Corporeal?

Mitt Romney famously insisted that corporations are people. We can disagree about the nature and quantum of rights that gives them relative to human beings, but for the purposes of a business bankruptcy analysis, Mitt was spot-on. A corporation is a legal person separate from the individuals who own the stock in the corporation. When the human across the table from you uses the first person pronoun to describe the state of the business, you have to stop them and ask: Who is “we”? Is the struggling business we’re talking about owned and operated by a corporation? If so, we head in one direction. If, however, the business is a sole proprietorship, we have different choices of destination. Corporate business Tell me that your business is incorporated and I need to pin down, before the interview is over, whether the individual or the corporation is my client. Their interests may be different. Even if there is no apparent conflict, good practice suggests you get a waiver of conflicts from each entity. What’s possible if the business is an entity separate from the shareholder? Most importantly, the bankruptcy of either one doesn’t involve the other. The corporation could file a Chapter 7 without pulling the shareholder into a bankruptcy. Conversely, the shareholder could file a bankruptcy, and his estate includes the shares in the corporation, but not the business itself. Is there a meaningful distinction there? Damn right. An incorporated business can continue to operate as usual when the shareholder files a personal bankruptcy. Chapter 7 trustees are instructed to shut down a business operated by a Chapter 7 debtor. The articulated concern involves post petition liabilities that might acrue to the bankruptcy estate as a result of continuing to operate. The “rule” is applied with less vigor and more variation as the business trends toward a consulting or personal services business. But if there are employees, business premises outside the home, or activities with significant risk involved, the trustee will generally want a Chapter 7 debtor to cease doing business. Not so, usually, if the individual is only the shareholder. The estate has the benefit of the net value, if any, of the shares, but the trustee isn’t accountable as directly for the activities of the corporate business post petition. Depending on your goals for the client, you can consider either incorporating a business before filing, or dissolving the corporation before filing. Sole proprietorships When the business is nothing more than a dba, the bankruptcy decision is an all or nothing proposition. The bankruptcy of the individual brings with it the business assets and business operation. The Code doesn’t provide for a bankruptcy that deals only with the business assets and business debts of the client. A Chapter 7 filing will address and discharge the business debts. It will probably require a business shut down. A Chapter 13 filing gives you and your client the option. You can close the enterprise or continue to operate since §1304 expressly allows the debtor to continue to engage in business. We’ve counted heads, now, around the conference table and know how many “people” we’re dealing with. Next time, we’ll look at other facts we need to extract before planning bankruptcy relief. There’s more about business bankruptcy issues on Bankruptcy in Brief. Image courtesy of Geograph.

ST

Jan 07, 2013 stevesathersbankruptcynews.blogspot.com

The Leif and Times of Judge Clark (Pt. One)

Twenty-five years ago, the Fifth Circuit appointed a former Lutheran minister who had been licensed a scant seven years to the bankruptcy bench in San Antonio. With the retirement of Judge Leif M. Clark on October 20, 2012, another long-serving Western District judge has moved on to a new stage of life. While Judge Clark may be departing the bench, he leaves practitioners with a body of work which can be characterized as thoughtful, controversial and occasionally irreverent but never dull. To do justice to Judge Clark would require me to quit my job and write for at least a year. Since I have a family to feed, I will focus on just a few highlights here. I am sure that others can add to what I have written and I encourage them to respond in the comments section. Personal HistoryLeif Clark (pronounced “Lâfe” not “Leaf”) earned a Masters of Divinity degree from Evangelical Lutheran Theological Seminary in Columbus, Ohio and served in specialized ministries for the American Lutheran Church. He graduated from the University of Houston School of Law (where he graduated with honors and was an editor on the law review). He went to work for Cox & Smith in San Antonio.In 1987, the Fifth Circuit appointed Judge Clark to the Bankruptcy Court for the Western District of Texas. Over the course of his judicial career, he sat in San Antonio, Austin, Waco and El Paso. Judge Clark has written approximately 400 opinions according to LEXIS, but the total is probably higher. He helped to design and administer a judicial training program for USAID, training judges in Ukraine, Poland, Latvia and Romania. For sixteen years, he taught American constitutional law to foreign students as part of the International Masters of Laws Program for McGeorge School of Law in Salzburg, Austria. He was actively involved in helping to develop international insolvency law. Judge Clark also served as an adjunct professor teaching bankruptcy at the University of Texas Law School.Judge Clark sang in Judge Richard Schmidt’s band, including such hits as “I Can’t Get to Confirmation” and a song about the 1111(b) election. Although Rule 9037 would not allow me to say this in a document filed with the Bankruptcy Court, according to his biography for the National Bankruptcy Conference: Judge Clark takes special pride in what he deems his most important accomplishments - his son, Harrison (born in 2003) and his daughter, Carson Renee (born in early 2006). And he values the love, partnership, and support that he enjoys with their mother and his wife, Rochel Lemler-Clark, who is a practicing commercial litigation attorney. They all live in happy chaos in San Antonio, Texas. Since leaving the bench, Judge Clark has opened a solo practice for mediation and arbitration. He can be reached at [email protected]. Sun Country DevelopmentOne of Judge Clark’s earliest contributions to Bankruptcy jurisprudence came while he was still a practicing attorney. In Matter of Sun Country Development, Inc., 764 F.2d 406 (5th Cir. 1985), the Fifth Circuit made the rather unremarkable statements that good faith depends on “the totality of circumstances” and that it is satisfied when a plan is proposed “with the legitimate and honest purpose to reorganize and has a reasonable hope of success.” However, the seminal line in the opinion, one which effectively put an end to the doctrine of artificial impairment in the Fifth Circuit was: Congress made the cram down available to debtors; use of it to carry out a reorganization cannot be bad faith. Id.at 408. I am told that this line came from Judge Clark’s brief and it has been cited by numerous cases over the years.Judge Clark’s Love of Colorful AnalogiesJudge Clark had a love for the colorful analogy which he used to great effect in his opinions. In Mahoney v. Washington Mutual, Inc. (In re Mahoney), 368 B.R. 579 (Bankr. W.D. Tex. 2007), Judge Clark gave an extended dissertation on whether sacrificing a goat to Mercury could be an act to collect a debt which would violate the discharge. He wrote:A creditor, smarting from the write-off of his loan, privately sacrifices a goat to Mercury, the Roman god of merchants, believing devoutly that Mercury will see to it that the debtor repays the creditor in full. The creditor takes no actions to publicize his sacrifice. He has no reason to believe that the debtor believes in Mercury, or cares about goats. Certainly, the sacrifice is an intentional act, and it was subjectively intended to collect the debt. Indeed, it might be easy to show that the creditor, "with malice aforethought," had every intent to violate the dickens out of the bankruptcy discharge. But so what? All the intention in the world would not convert the creditor's sacrifice into "an act to collect, recover, or offset" the debt in question. Intentionally performing a useless and ineffective act cannot violate section 524(a) because a useless and ineffective act will not count as a proscribed act within the meaning of the statute -- regardless of the avowed "intent to violate the discharge injunction."***Our goat sacrificing example above is a helpful, if fanciful, illustration of this principle. Most reasonable people will readily agree that goat sacrificing is not an act likely to be effective in collecting, recovering or offsetting the debt in question. But let's suppose that, before the fated sacrifice, the creditor first sends a photo of the unfortunate goat to the debtor with a note saying "Pay me or the goat is cabrito!" These additional facts are enlightening, but we still do not know whether they are sufficient to count as an act to collect, recover, or offset the debt, because we cannot yet gauge the likely impact of this threat on the debtor. If, however, the facts also showed that the debtor is also a devout believer in Mercury -- or a deeply committed animal rights activist -- then we might have enough facts to suggest that the note and the photo count as an act to collect on a debt -- even without the actual sacrifice. This final fact shows the coercive impact of the missive, sufficient to fairly describe the act as likely to be effective to collect a debt. We can now say, on these facts, that sending such a missive to such a debtor could work as a collection device. On the other hand, if the evidence showed that the debtor believes that all Mercury worshipers are idiots, and couldn't care less about killing goats, then the creditor's threatened sacrifice, and its publication of that threat to the debtor still lack coercive impact, and so would not likely count as an act to collect a debt.Id. at 587, 588.In another opinion, Judge Clark used a personal example to demonstrate the lack of utility of multi-part tests.A person is sent into a crowded room with directions to find Judge Clark by applying the following multi-factor test: (1) tall, (2) blond hair, (3) angular features, (4) dressed stylishly, and (5) having a resonant voice. The person returns with David Bowie in tow. If the person had simply been given a recent picture of Judge Clark (which would have been worth far more than all the factors one could write down on a piece of paper), chances are he would have quickly returned with the judge, not the singer.Official Committee of Unsecured Creditors v. Grant Thornton (In re Schlotzky’s, Inc.), 351 B.R. 430, 435, n. 9 (Bankr. W.D. Tex. 2006). I don't know. When Judge Clark wasn't wearing a robe, I might have had trouble distinguishing him from David Bowie.On another occasion, Judge Clark used the Brooklyn Bridge to explain why claiming an exemption is not sufficient to grant title to the object claimed, even in the absence of a timely objection. Just in case there is any confusion, let’s suppose I claim an exemption on the Brooklyn Bridge, and you fail to timely object to my exemption claim. Is the sainted bridge thus exempt? Technically, section 522(l) says it is. But of course, what difference does my exemption claim make if Hizzoner, Mayor Bloomberg, comes to court and successfully establishes that, in fact, the Brooklyn Bridge is not my bridge to claim, but is safely still the property of the City of New York, safely untarnished by my exercise in hubris? None at all you correctly reply, none whatsoever.In re Rendon, No. 06-52501 (Bankr. W.D. Tex. 2006)(available here). Finally, although Judge Clark insists that he does not want this to be his legacy, he once cited an Adam Sandler movie in denying a pro se motion “for being incomprehensible.” Or, in the words of the competition judge to Adam Sandler’s title character in the movie, “Billy Madison,” after Billy Madison had responded to a question with an answer that sounded superficially reasonable but lacked any substance, Mr. Madison, what you've just said is one of the most insanely idiotic things I've ever heard. At no point in your rambling, incoherent response was there anything that could even be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.Deciphering motions like the one presented here wastes valuable chamber staff time, and invites this sort of footnote.Factac v. King (In re King), No. 05-5171 (Bankr. W.D. Tex. 2006)(available here). In Part Two, I will focus on some of Judge Clark's more substantive opinions.

TA

Jan 06, 2013 tampabankruptcy.blogspot.com

Rule 3002.1(c) Date Incurred

Rule 3002.1 was added to the Federal Rules of Bankruptcy Procedure in April 2011, effective December 1, 2011 in order to insure debtors who complete chapter 13 plans are not burdened with undisclosed mortgage fees and costs. The problem was well described in In re Sheppard, 2012 WL 1344112, Bankr. E.D.Va, 2012). Bankruptcy Rule 3002.1 was adopted to resolve significant and often hidden problems encountered by Chapter 13 debtors who utilized § 1322(b)(5) of the Bankruptcy Code to cure mortgage defaults in their confirmed plans.5 While debtors could cure an arrearage on their principal residence under § 1322(b)(5), they often incurred significant fees and other costs as a result of postpetition defaults or from interest or escrow fluctuations under the terms of the original loan documents. Fearful that any attempt to address these fees and charges could be construed as a violation of the automatic stay, many creditors would not inform debtors that these charges had been incurred until after the Chapter 13 case was closed. As the fees and charges were postpetition obligations not included in the plan and thus not discharged at the conclusion of the case, these debtors would emerge from bankruptcy only to face a substantial and previously undisclosed arrearage. This outcome was inconsistent with the goal of providing debtors with a fresh start.Subsection (c) of this rule requires mortgage companies to give notice of any fees within 180 days of the date the fee is incurred. (c) Notice of Fees, Expenses, and Charges. The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice itemizing all fees, expenses, or charges (1) that were incurred in connection with the claim after the bankruptcy case was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence. The notice shall be served within 180 days after the date on which the fees, expenses, or charges are incurred. One issue arising from this, which does not appear to have a reported case on it, is when the fees were incurred. The notice itself filed by the creditor will likely have a date the fee was allegedly incurred, but there is no explanation of how this date was determined. Likely, this will be the date the creditor actually paid the bill. However, given the purpose of the rule, to prevent 'surprise' charges after completion of a case, it would seem an appropriate interpretation of the statute would be to require the notice within 180 days of any services for which the debtor is ultimately charged. Otherwise, mortgage companies could simply not charge the account or pay the bill until the case is over, and again deal with debtor's who are no longer represented by counsel. One would presume the fees are incurred no later than the filing of the claim if the claim is filed by counsel, and if no other activity is done in the case. As an example in a case pending now a notice under Rule 3002.1 was filed on 10/29/12 alleging a fee of $425 in a case purportedly incurred on 5/15/12. However, the only action in the case was the filing of a claim by the mortgage company (showing no arrearage) on 4/12/12. If the 5/15/12 date was correct, the notice was filed 167 days following the charge. If the 4/12/12 date is the date the fees were incurred, the notice was filed 200 days following the charge. This difference would affect whether the charge was allowable under Rule 3002.1(c). Note there is a separate issue whether any fees are reasonably incurred when there were no arrearage in the case.

BA

Jan 02, 2013 www.bankruptcymastery.com

Mortgage Forgiveness Tax Break Renewed

The tax break protecting homeowners from phantom income when their homes are foreclosed was reauthorized in the last minute fiscal cliff bill. The problem is rooted in the tax code provision that treats debt that is cancelled as if it were income. While debt cancelled in a bankruptcy case is an exception to the rule, homeowners who lost their homes and had debt cancelled as a result were exposed to the inclusion in their gross income of money they never saw. The bill that has protected homeowners outside of bankruptcy for the past four years was set to sunset December 31. The extension will protect homeowners in certain circumstances from cancellation of debt income. Become familiar with the requirements. And check your state tax codes to see if state tax law mirrors the federal law. Other pitfalls This federal tax provision is not the answer to all problems at the intersection of tax and foreclosure. Remember that the safe harbor doesn’t cover refinances or second homes and rental property. If a property that doesn’t qualify for the exception is foreclosed before a bankruptcy is filed, the tax consequence is not mitigated by the later filing of bankruptcy. (The insolvency exception may help, but note that it includes retirement assets in the balance sheet test.) Further, foreclosure is a sale for the purposes of capital gains taxes. Since the capital gain is measured by comparing the tax basis with the sale price (not the sale proceeds), those who suffer foreclosure may still have a capital gains tax to deal with. Image courtesy of RyanLerch.

TR