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  The court looked to the history of the statute, noting a subsequently-repealed provision providing for registration of an order of discharge in districts other than that where it was entered.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

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

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

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

Chapter 7 Bankruptcy Guide: Understanding Discharges and How they Can Help You can refinance your debt to get it under control or even get on a more affordable payment plan, but most people will agree that all they really want to do is get rid of the debt forever. They wish they could just wave a magic wand and make it go away. In some ways, filing for Chapter 7 bankruptcy is like waving a magic wand since it can make debt go away in the right circumstances. You’ll need to talk with a Mesa Chapter 7 bankruptcy attorney to find out if you qualify and to learn the ins and outs. Here’s a little bit more information to give you an overview: What Debts are Discharged? Most people who are looking into Chapter 7 bankruptcy are most interested in finding out what kinds of debts they can discharge and how much. The short answer – and the goods news – is: A lot. Chapter 7 bankruptcy discharges unsecured debts once your assets are liquidated to pay what you can. Unsecured debts include things like credit cards, medical debt, and personal loans. The bankruptcy will typically discharge whatever is owed. So if you owe your credit cards $50,000, the bankruptcy will discharge all $50,000 in debt. Of course, as with anything in life, there are caveats. You must meet the income guidelines to qualify to file for Chapter 7 bankruptcy, and your assets will be analyzed to see what you can pay toward your debt first. Debts that are Not Discharged You can’t discharge everything you owe in a Chapter 7 bankruptcy. Some debts are excluded. Examples include child support and alimony, either your ongoing payment or any amount that you have not paid over time. If you want to get out of paying those, you’ll need to talk to a family law lawyer about modifying your agreement. You also won’t be able to discharge tax debt or anything you owe to the government, such as for criminal penalties or restitution. You also can’t discharge student loan debt. Well, technically you can discharge student loan debt, but it is so hard to do and the chances of your request being approved are so slim that you might as well accept that it can’t be discharged. Even though you can’t discharge these debts in a Chapter 7 bankruptcy, you can free up a lot of money by discharging your other debts. You can then use that money to get current on the debts that cannot be discharged. You’ll have greater control of your finances and less debt overall. Liquidating Assets You can’t just proclaim that you aren’t able to pay and then have all your unsecure debt discharged under a Chapter 7 bankruptcy. In addition to passing the “means test” to qualify to file for Chapter 7, you also have to submit your assets for review. A certain amount of your assets will be exempt, such as personal belongings, equity in your home, and equity in your car. Your bankruptcy attorney will go over the specific exemption limits and help you understand which of your assets may be subject to liquidation, if any. Filing for Chapter 7 bankruptcy can help you get rid of quite a bit of debt and start taking control of your finances again. You will need to meet with a Mesa Chapter 7 bankruptcy lawyer to review your finances and to learn how bankruptcy can help you, specifically. If you can’t qualify for Chapter 7, you can file for Chapter 13 bankruptcy and get a more manageable debt-repayment plan that will be done in just three to five years. Call My AZ Lawyers today to talk with a bankruptcy attorney about your options. We’ll help you understand how bankruptcy can benefit you personally and what strategy will give you the greatest debt relief. Our attorneys will perform a thorough review of your finances and then help you file for bankruptcy. You could be on your way to a fresh financial start fast. We serve clients in the Mesa, Glendale, Tucson, and Phoenix areas. Call us today to schedule an appointment with a Chapter 7 bankruptcy attorney and to start learning about your options for debt relief. My AZ Lawyers Mesa Location: 1731 West Baseline Rd., Suite #100 Mesa, AZ 85202 Office: (480) 448-9800 Glendale Location: 20325 N 51st Avenue Suite #134, Building 5 Glendale, AZ 85308 Office: (602) 509-0955 Tucson Location: 2 East Congress St., Suite #900-6A Tucson, AZ 85701 Office: (520) 441-1450 Avondale Location: 12725 W. Indian School Rd., Ste E, #101 Avondale, AZ 85392 The post Chapter 7 Bankruptcy Guide: Understanding Discharges and How they Can Help appeared first on My AZ Lawyers.

Restaurant Closings in New York City and BankruptcyAs reported by many newspapers and websites, a significant number of restaurants are closing in New York City. These closings are due to the high cost of rent, insurance,  overhead and the increase in the minimum wage to $15 per hour for the restaurant staff. A restaurant consultant who meet with me stated that a Ray Kroc associate told an individual not to open a restaurant unless they were prepared to clean the bathroom and wipe the floor themselves due to the thin margins in many restaurants. At Shenwick & Associates,  we have seen a significant uptick in bankruptcy filings by restaurant and restaurant owners and we have developed a legal strategy to deal with these situations.We focus on the financial issues related to the restaurant first and then to the owner of the restaurant second. Most restaurants are owned by LLC or Subchapter S corporations. We first  review the assets and liabilities for the restaurant and a recent budget showing revenue and expenses for the year to date. We review that information with  the owner and determining whether the restaurant should  close or file for bankruptcy and we then focus on issues related to the owner of the restaurant.Restaurants are eligible to file for chapter 7 or chapter 11 bankruptcy. Chapter 7 is a liquidation where the restaurant is closed or chapter 11 is a reorganization where the business can attempt to reorganize its debts. In the Southern and Eastern District of New York (Manhattan, Brooklyn, Queens and Nassau county)  historically on average only one out of 10 businesses are able to successfully reorganize (file and confirm a chapter 11 plan of reorganization). There are many reasons for the low percentage of success, but many of those factors related to the cost and expense of filing chapter 11 bankruptcy and the inability to obtain financing and capital from third parties or banks.The option that most restaurant owners face is  either to close the restaurant or file Chapter 7 bankruptcy for the LLC or S Corporation that owns the  restaurant. In Chapter 7 bankruptcy a bankruptcy trustee closes the restaurant and liquidates any inventory, furniture fixture or equipment and attempts to collect accounts receivable. The chapter 7 trustee then takes those monies, if any  and distributes them to creditors after paying legal fees and court costs.It's the restaurant does not have significant amounts of furniture fixture or equipment or accounts receivable, the owner may be better off closing the restaurant itself and selling or auctioning off any furniture fixture and equipment and attempting to collect its own accounts receivable. Additionally, if the restaurant lease has a term of 3 years or more and is below market the restaurant owner may be able to assign (sell) the lease to a 3rd party. A Chapter 7 bankruptcy trustee is permitted to bring lawsuits to  recover monies that may have been paid to third parties ( preference actions)  or recover money or property paid to a third party ( fraudulent conveyance actions)  and the bankruptcy trustee will want to review the books and records for the restaurant, its checking account  and tax returns. The owner of the restaurant will have to go to one meeting at the courthouse (called the 341 hearing) and cooperate with the bankruptcy trustee. These factors often affect whether a restaurant will file for chapter 7 bankruptcy or just close.Notwithstanding the fact that the restaurant is owned by an LLC or Subchapter S corporation, members of the LLC, including the officers, directors,  shareholders or the individuals that signed the checks may be liable for certain debts of the restaurant after it closes (discussed below). Some of those debts may be “responsible person taxes” which are trust fund taxes such as sales tax or  FICA/FUTA taxes withheld from an employee's wages or the FICA/FUTA tax penalties. Sales tax and FICA/FUTA  taxes are not dischargeable in personal bankruptcy, so those debts should be paid prior to the restaurant closing or paid from the sale of furniture, fixtures and equipment, collection of accounts receivable or from the sale of the lease. Next, if a member of the LLC or a shareholder guaranteed a lease obligation, or guaranteed debts  to a supplier, they be personally liable ( discussed below). There are 2 types of lease guaranties, good guy guaranties and lease guarantees and the type of guaranty can affect the amount owed by the restaurant owner. If a supplier to the restaurant is not paid, the restaurant is generally liable, however in certain instances, the supplier will look for a “deeper pocket” and sue the individual arguing “alter ego” or “piercing the corporate veil” and attempt to sue not only the restaurant but the owner of the restaurant as well.The owner of the restaurant, may also be liable personally for wages not paid to the restaurant staff under the New York State Business Corporation law.A restaurant owner with significant business debts may need to file a Chapter 7 bankruptcy or attempt an out-of-court workout with respect to the monies that it  owes. To determine whether a restaurant owner should file bankruptcy or attempt to do an out-of-court workout with its creditors, we need to see a list of assets or property that the restaurant owner owns, a list of  liabilities or money or property owed to third parties and an after-tax monthly budget, showing what the restaurant owner earns what it pays in personal and business expenses.Unfortunately, in many instances after the restaurant is closed, the restaurant owner needs to file a Chapter 7 or Chapter 13 personal bankruptcy and James Shenwick is available  to help address these issues. Jim Shenwick 212 541 6224, jshenwick@gmail.com 

With the increase in bankruptcy filings, many clients have contacted us regardingthe treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow from their pension prior to filing for bankruptcy, if necessary.Under the law, both Roth and traditional IRA’s are exempt  up to $1,283,025 in a chapter 7 bankruptcy filing.401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at jshenwick@gmail.com

Divorce can be both expensive and traumatic for the parties going through it but in a few states, it can be expensive for the outside party causing the divorce. As one Texas debtor recently found out, causing a marriage to crumble in North Carolina can result in a non-dischargeable debt.   King v. Huizar (In re King), No. 19-5007 (Bankr. W.D. Tex. 10/2/19).   The case, which can be found here, serves as a reminder that an obscure tort can fit within the broad confines of willful and malicious injury.Some Background on Alienation of AffectionsKing v. Huizar involved a North Carolina judgment for alienation of affections.   The Debtor in the case made an unfortunate choice of a married woman to pursue because North Carolina is one of just six states which still recognizes the tort of alienation of affections. (The others are Hawaii, Mississippi, New Mexico, South Carolina and Utah).  Under North Carolina law, the elements of alienation of affections are: (1) That he and his wife were happily married, and that a genuine love and affection existed between them; (2) that the love and affection so existing was alienated and destroyed; (3) that the wrongful and malicious acts of the defendant produced and brought about the loss and alienation of such love and affection.  Litchfield v. Cox, 146 S.E.2d 641 (N.C. 1966).    Alienation of affections is one of several torts regarding the marital relationship which seem outdated today.   In Tinker v. Colwell, 193 U.S. 473 (1904), the Supreme Court had this to say about the tort of criminal conversation (i.e., adultery):We think the authorities show the husband has certain personal and exclusive rights with regard to the person of his wife which are interfered with and invaded by criminal conversation with her; that such an act on the part of another man constitutes an assault even when, as is almost universally the case as proved, the wife in fact consents to the act, because the wife is in law incapable of giving any consent to affect the husband's rights as against the wrongdoer, and that an assault of this nature may properly be described as an injury to the personal rights and property of the husband, which is both malicious and willful. 193 U.S. at 481.In today's modern, secular society, the idea that one party to a marriage may have property rights in his/her relationship with the other spouse seems quaint and frankly Victorian.  One law review article has suggested that the same principles which prevented states from outlawing same-sex marriage could lead to a similar result with adultery-related torts.Justice Kennedy’s discombobulating blend of equal protection and substantive due process in Obergefell may signal another evolution in constitutional law by indicating that state action which infringes on these fundamental rights of personal dignity, intimacy, and marital choice should not be left to the political process when the state’s justifications hinge on essentially moral objections. The arguments against adultery and same-sex marriage are strikingly similar. Many Americans believe adultery and same-sex marriage harm the institution of marriage and the traditional idea of family. Many Americans find both practices morally repugnant. Those beliefs are not the problem, but they become a problem “when that sincere, personal opposition becomes enacted law and public policy . . . [and] put[s] the imprimatur of the State itself on an exclusion that soon demeans or stigmatizes those whose own liberty is then denied.”Bruton, The Questionable Constitutionality of Curtailing Cuckolding:  Alienation-of-Affection and Criminal-Conversation Torts, 65 Duke Law J. 755, 799 (2016).  Unfortunately for Mr. Huizar, North Carolina still recognizes the tort of alienation of affections and the extensive fact finding by the state court judge brought the judgment squarely within 11 U.S.C. Sec. 523(a)(6).   An Affair That Ultimately Outlasted a Marriage Keith King and Danielle King were married on April 3, 2010.   Mrs. King frequently posted on Facebook about how much she loved her husband and started a "Good Wives Club" to help friends in their marriages.   Keith King had a business called King BMX Promotions.   Mrs. King worked in the business.   In August 2015, the Kings put on a show at the Erie County Fair in New York.   After Mr. King left to go to a show in Colorado, Mrs. King met Francisco Huizar, who was working as a marketing agent at a Geico Insurance booth.  Mrs. King and Mr. Huizar apparently spent an evening together as Mrs. King left her child with the nanny.On August 28, 2015, Mr. King discovered flirtatious text messages with Mr. Huizar on his wife's phone and Mr. King called up Mr. Huizar and told him to leave his wife alone.  It does not appear in the opinion, but according to a newspaper article about the trial, Mr. King was controlling and insisted on inspecting his wife's phone on a regular basis.   Mrs. King told Mr. King that she was through with Huizar and he believed her.  However, that was not true.   Instead, Mr. Huizar traveled to Durham, North Carolina and stayed at a Candlewood Suites hotel located one mile from the King residence on at least seven occasions from August to November 2015.In November 2015, Mr. Huizar's girlfriend contacted Mr. King and let him know that Mr. Huizar and Mrs. King were talking on the phone a lot, 6,000 minutes of conversations over the course of four months.   Mr. King called Mr. Huizar again and told him to leave his wife alone.   During the period from August to November 2015, when Mr. Huizar and Mrs. King were talking and having hotel visits, Mr. and Mrs. King were engaging in marriage counseling.   In late November 2015, Mrs. King once again stated that she would have no further contact with Mr. Huizar.   From August 2015 through March 2016, Mrs. King made Facebook posts about how much she loved her husband.   (While the court apparently took these Facebook posts at face value, they could just as easily have been an attempt to cover up the affair).The affair continued.  Mr. King bought his wife a  beach spa weekend as a birthday present and Mr. Huizar was there.   Mr. and Mrs. King went to the beach for a vacation and Mr. Huizar was there.  Throughout 2016, Mrs. King vacillated between continuing the affair and reconciling with her husband.   Things escalated in June 2016, when Mr. Huizar took Mrs. King as his date to a wedding in Ohio and then helped her "in running away" from Mr. King across state lines.   Matters came to a head on January 20, 2017.  Mrs. King had moved into an apartment with Mr. Huizar.   She called Mr. King to come over and help her with a broken breaker.  When Mr. King arrived, he was greeted by Mr. Huizar who put him in a headlock while Mrs. King filmed the encounter.   This did not help the marriage.The Jilted Husband Strikes Back Mr. King filed suit on April 6, 2017.  He was not able to serve Mr. Huizar personally so he was served by publication with the foreseeable result that he did not answer.   An entry of default was made on January 3, 2018.   The Court refused to set aside the default but allowed Mr. Huizar to present whatever evidence he wanted to at trial.   Following five days of trial, the Court entered judgment against Mr. Huizar for $8.8 million.The damages awarded reflected a curious outlook on the husband's property rights in the wife.    The largest amounts of damages were for the cost of having to hire a replacement to work in the business and for the household services that Mrs. King would not be performing as a result of the divorce.  Damages also included counseling, attorneys' fees and medications.   The total amount of economic damages awarded was $1,215,312.00.   The Court then awarded an additional $1,000,000 in non-economic damages "to include loss of love, affection, and consortium, loss of sexual relationship, loss of society, companionship and comfort, loss of favorable mental attitude, mental anguish and decline in health and shame and humiliation.    The Court then awarded punitive damages of $6,645,936.00 based on three times the amount of actual damages.In awarding punitive damages, the court made some findings which would be troublesome in the subsequent adversary proceeding.   The Court found that  Mr. Huizar "conducted malicious, wanton, and willful behavior in interfering with Plaintiff's marriage," that he acted with "malice and willful and wanton conduct," that he acted with "conscious and intentional disregard of and indifference to the rights and safety of others" and that his conduct was "reprehensible and malicious."The Court showed curious disregard for Mrs. King's agency and free-will.   When Mrs. King posted Facebook messages about her wonderful marriage and how they were trying to work things out, the Court accepted that as fact.  When Mrs. King testified at trial, the Court found that she "was not a credible person and that she contradicted herself."   While it is not present in the court's opinion, a newspaper account of the trial quoted Mr. Huizar's attorney as saying:Keith King, who is 15 years older than his wife, controlled her access to money, manipulated her low self-esteem, brought porn into the relationship, looked through her phone every other week, put her to work without pay, and continued to schedule shows after she said it was too much work and she needed help with her daughter, (Huizar's attorney) said. He tracked her movements and insisted she keep her hair blond, and wear bikinis and high heels,...Virginia Bridges, "He slept with a married woman. Now a judge says, pay the jilted husband $8.8 million," Kansas City Star (July 26, 2018), https://www.kansascity.com/news/nation-world/article215577310.html. Mr. King also testified that he marriage was unhappy from the beginning and that she had pursued Mr. Huizar. This was apparently the testimony that the Judge did not find credible. The Debtor Does Not Escape Judgment in Bankruptcy Court The same article same that Mr. Huizar would appeal. He did not. Instead, he filed bankruptcy in San Antonio. Mr. King filed an adversary proceeding under 11 U.S.C. Sec. 523(a)(6) and moved for summary judgment based on collateral estoppel and res judicata. As indicated by the state court findings mentioned above, Judge Gargotta found ample grounds for excepting the debt from discharge as one for willful and malicious injury. He wrote:The third element of alienation of affection includes the Fifth Circuit’s definitions of “malicious” and “willful” by requiring evidence that harm was caused because of the intentionally wrongful and malicious acts of the defendant. In addition to determining that Huizar’s actions met the element of “malicious activity” in ruling in favor of Plaintiff on the alienation of affection claim, the North Carolina Court specifically determined that Huizar’s actions were willful and malicious:a. “Defendant’s behavior was reckless, wanton and malicious.” (Complaint Ex. A, ECF No. 1-1, ¶ 36);b. the “conduct of [Huizar] in this matter has been malicious, reckless, wanton, aggravated, and willful” (Id. at ¶ 86);c. Huizar’s behavior was “willful, wanton, reckless, brazen and malicious.” (Id. at ¶ 88); d. “[Huizar] conducted malicious, wanton and willful behavior in interfering with Plaintiff’s marriage from August 2015 through the King’s marital separation and…he continued the behavior until the parties were divorced in December 2017.” (Id. at ¶ 95);e. “[Huizar’s] conduct during the King’s marriage was reprehensible and malicious.” (Id. at ¶ 101);f. “This Court finds as a fact by clear and convincing evidence that aggravating factors are present in this matter, including but not limited to malice and willful and wanton conduct on the part of the Defendant, with the conscious and intentional disregard of and indifference to the rights and safety of others, which Defendant knew or should have known was reasonably likely to result in damage, injury or other harm.” (Id. at ¶ 99).Opinion, pp. 14-15.The Court also found that several clever defenses were unavailing. First, he argued that when Congress omitted criminal conversation and alienation of affections from the list of non-dischargeable debts, it intended to render those debts dischargeable. He also relied on legislative history indicating that prior case law under the antecedent to section 523(a)(6) which applied a "reckless disregard" standard was overruled. Noting that this was an issue of first impression in the Fifth Circuit, Judge Gargotta relied on cases from other circuits finding that these torts were still nondischargeable.The Court also found that:Huizar’s arguments that claims for relief involving alienation of affection and criminal conversion are arcane and without merit is not for this Court to decide. This Court must give comity to the North Carolina state court judgment. Huizar’s argument that these claims for relief are contrary to law ignores the fact the neither the North Carolina Legislature or State Supreme Court have overturned these causes of action. Opinion, p. 18.Finally, the Court rejected the argument that the state court judgment was "void as unconstitutional restraint on Defendant's guaranteed free speech rights and under the First and Fourteenth Amendments of the U.S. Constitution. The Court found that the Debtor received adequate due process notwithstanding the citation by publication and rejected the free speech argument.Even assuming messages of affection or intimacy conveyed during extramarital affairs are forms of expression protected by the First Amendment—and this Court makes no finding that they are—Defendant fails to mount an appropriate facial or as-applied challenge to the law. Moreover, the underlying facts seem to suggest the Defendant and Danielle Swords King had no intention of ever convey their “message” to the public where it could be observed. Opinion, p. 19. Final ThoughtsI agree with the Debtor that North Carolina's laws on alienation of affection are arcane because they rely on, at least in this case, the paternalistic assumption that a husband has a property interest in his wife. Moreover, as the Duke Law Review article mentioned above argues, there may be a valid ground to challenge the state's effort to regulate private conduct on morality grounds. However, as Judge Gargotta correctly found, the place to challenge the constitutionality of the law was in the North Carolina courts and not in the Bankruptcy Court. I have two take-aways from this opinion. The first is that Section 523(a)(6) can cover a broad array of conduct. It can apply to conduct ranging from hitting someone with a baseball bat to conversion to defamation. As long as there is a state law cause of action which requires proof that an injury was willful and malicious it can be brought within the subsection. The second is that it is often too late to discharge an adverse state court judgment once the factual findings have been made. A party in this situation should either file bankruptcy prior to trial and avoid findings from an unsympathetic court or challenge the judgment on appeal in the state court.

How New York’s Taxi Titans Roiled Cities Hundreds of Miles AwayIn the early 2000s, a group of New Yorkers did something unexpected.They bought a bunch of taxi medallions that allowed them to own and operate vehicles hundreds of miles away, in Chicago. Medallions in that city were considered such an inexpensive commodity that Chicago had, at times, given them away free.This turned out to be an early sign of a takeover of taxi markets across the country by some New Yorkers who were about to teach drivers in other cities a painful lesson.The real taxi money wasn’t made by charging passengers; it was made by raising the price of medallions and financing loans to drivers who wanted to buy them.The scheme started in New York.In May, The Times’s Brian M. Rosenthal exposed the financial maneuvers that helped lead to the collapse of the taxi industry in New York City.His series detailed potential market manipulation of taxi medallion prices and showed how some of the people who manipulated those prices also made money by providing drivers with high loan amounts, long loan lengths, steep fees and interest-only terms.The Department of Justice and the New York attorney general soon opened investigations into the industry. The city arrested a debt collector, waived $10 million in fees owed by medallion owners and strengthened regulations.The taxi titans expanded their operations to Chicago …Symon Garber, a New York fleet owner, along with a group of partners, began buying medallions in Chicago and lending to other buyers. They eventually bought 800 of the city’s 7,000 medallions.Michael Levine, a legend in New York’s taxi industry, bought more than 500 medallions in Chicago. Mr. Levine also was involved in a company that provided at least 750 loans to medallion owners.At least 40 other New Yorkers bought Chicago medallions, including Michael Cohen, President Trump’s former lawyer, records show.… and to Boston, Philadelphia and elsewhere.Then some of the same people who roiled New York’s industry expanded their operations. Medallion prices soared to $700,000 in Boston, $550,000 in Philadelphia, $400,000 in Miami and $250,000 in San Francisco.But in Chicago, New Yorkers eventually bought almost half of that city’s medallions, records showed. The average cost of a medallion there — less than $50,000 in 2006 — rose to nearly $400,000 before prices began plummeting in 2013.Today, a Chicago taxi medallion is worth $30,000 or less.“In retrospect, it should’ve set off alarm bells” that New Yorkers were entering Chicago’s market,” said Michael Negron, who was a policy adviser to Rahm Emanuel, a former Chicago mayor. “Outside investors were coming in to upend the industry, and everybody kind of missed it.”The New Yorkers who bought medallions in Chicago and elsewhere said in interviews with Mr. Rosenthal that they were never accused of breaking any laws. They said that as New York medallion prices rose, it made sense to pursue new opportunities.

Pensions and Chapter 7 Bankruptcy filingsWith the increase in bankruptcy filings, many clients have contacted us regarding the treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow money from their pension prior to filing for bankruptcy.Under the law in New York both Roth and traditional IRA’s are exempt  up to $1,283,025 in a chapter 7 bankruptcy filing.401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at jshenwick@gmail.comjshenwick@gmail.com • Shenwick & Associates