As all debtor attorneys know, it is critical to schedule all creditors when a case is filed.  The consequences of an error, omitting such a creditor is illustrated in Brenner's Restoration, Inc. v. Somerville, 2019 Bankr. LEXIS 3172, case #18-20807-MMH (Bankr. D. Md. 4 October 2019).  Here Somerville filed for relief under chapter 13 on 14 August 2018.  Somerville filed a timely list of creditors and matrix, but had omitted Brenner's Restoration from that list.  Brenner's had performed work on a house owned by the Debtor and a non-debtor prepetition, and served process on the Somerville 18 October 2019.  Despite receipt of service of process, Sommerville failed to amend the schedules (or, apparently file a suggestion of bankruptcy in the state court litigation) until after the 23 October 2018 claims bar date.  No notice of the bankruptcy was provided until garnishment of Debtor's paycheck.  Upon receipt of notice of the bankruptcy, Brenner filed requesting authority to file a late proof of claim, or alternatively sought relief from the stay to pursue the debtor and non-debtor co-owner of the property in state court.  Somerville's counsel objected solely to lifting the stay, but the court set both matters for hearing, and ultimately denied both requests, but also ruling that the debt was nondischargeable.  The court noted that while §502(a) permits an untimely proof of claim to be allowed, such untimeliness is an express ground for objection under §502(b)(9).  Should the court disallow the late claim under §502(b)(9), the claim may be discharged given §1328's provision providing that the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under §502.  That harsh result is tempered by §1328's reference to §523(a)(3), which generally provides for nondischargeability of claims not noticed in time to file a claim.  Next the court looked to the Bankruptcy Rules regarding extensions of time to file pleadings.  Rule 9006(b)(3) permits extensions to file claims only in accordance with the requirements of §3002(c).  This rule was amended in 2017 to allow a creditor to file a late claim if the notice given the creditor was insufficient to give the creditor a reasonable time to file a claim because the Rule 1007(a) schedule of creditors was not timely filed, or if the notice was mailed to the creditor at a foreign address.   Since Somerville did timely file the schedule of creditors and matrix, this section does not permit an extension of time to file the claim.  It is irrelevant to this provision that such matrix omitted this particular creditor.  This leaves the creditor with the remedy of §523(a)(3) as incorporated in §1328: a creditor with inadequate notice of the claims bar date who is not permitted to file a late claim is not subject to the chapter 13 discharge.  The creditor remains subject to the automatic stay of §362 and §1301 until such stay is terminated by court order or the operation of law.  Practice pointer: for debtors: it is generally worth pulling credit reports prior to filing, as well as requesting a complete list of creditors from the client prior to filing.  for creditors: be aware of the consequences of seeking allowance of a late claim.Michael BarnettMichael Barnett, PA506 N Armenia Ave.Tampa, FL 33609-1703813 870-3100https://hillsboroughbankruptcy.com    

In the Fifth Circuit's opinion in French v. Linn Energy, LLC (In re Linn Energy, LLC), 2019 U.S. App. Bankr. LEXIS 26595 (5th Cir. 9/3/19), which can be found here, Judge Edith Brown Clement deftly sums up the case in her first sentence:In this case we decide that payments owed to a shareholder by a bankrupt debtor, which are not quite dividends but which certainly look a lot like dividends, should be treated like the equity interests of a shareholder and subordinated to claims by creditors of the debtor.If that's all you wanted to know you can stop reading, but this opinion has a good explanation of how subordination of claims related to securities works.   You  may remember the children's game of chutes and ladders where a party landing on a ladder gets sent to the bottom.  That is an approximation of how subordination works.   Introduction to Subordination Under the Code There are three types of subordination recognized by 11 U.S.C. Sec. 510.   Section 510(a) gives force to contractual subordination provisions.   Section 510(c) allows for equitable subordination.   Finally, Sec. 510(b) allows subordination of claims related to securities.   Thus, subsections (a) and (b) provide for automatic subordination while subsection (c) depends on the specific facts and the court retains some discretion in applying it.  The actual text of Sec. 510(b) is somewhat dense.For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock. There are three types of claims which get subordinated under this provision:a claim arising from rescission of a purchase or sale of a security of the debtor;a claim for damages arising from the purchase or sale of such a security; or a claim for reimbursement or contribution allowed under section 502 on account of such a claim.According to Judge Brown, "Section 510(b) serves to effectuate one of the general principles of corporate and bankruptcy law: that creditors are entitled to be paid ahead of shareholders in the distribution of corporate assets."   So far it seems simple.  There are three types of securities-related claims which get subordinated.  Subordination is mandatory.   However, what about a claim that doesn't fit neatly into one of those categories?   According to Judge Brown's opinion, the reach of Section 510(b), as defined by its purpose, is greater than its text.Usually by now, I would have discussed the facts of the case.  In a typical case, the facts tend to lay out the issue.  However, in this case, you cannot make sense of the facts until you have the statutory background I have set forth above.A Muddled Factual Mess Requiring Great Simplification and a Recap  A wealthy man owned a company.  Upon his death in 1930, he placed 250 shares of stock in a company called BPC into a trust for his relatives.  The relatives would receive a percentage of the dividends issued on the stock.   When the junior group of beneficiaries came of age, they had their stock shares issued to them.  However, their elders still had a right to receive a percentage of the income from the stock.   An equitable charge was issued against the stock to ensure that the senior trust beneficiaries received their share of the income.  This meant that although the junior beneficiaries owned the stock, their elders had the right to receive a percentage of the dividends.   In 1986, BPC went public and had a dispute with one of its shareholders.   The company agreed to buy out the shareholder.  However, the shares to be bought out were subject to the equitable charge.   As a result, retiring the shares would reduce the amount of income paid to the senior beneficiaries from the stock that was placed into trust in 1930.In 2013,  BPC agreed to a share for share exchange with Linn Energy, LLC.   Linn agreed to honor the deal to pay deemed dividends to the surviving senior beneficiaries of the trust, only one of whom was still alive.  Alas, upon the merger, the payments stopped.Linn filed a declaratory judgment action asserting that it did not owe anything to Bennett, who was the surviving senior beneficiary.  Bennett counterclaimed.  Then Bennett died and his estate filed an amended counterclaim.    In May 2016, Linn filed bankruptcy.  Bennett's estate filed a claim of $10 million of deemed dividends.   The Debtor objected to the claim and also sought equitable subordination.  The Bankruptcy Court granted equitable subordination.   To recap, Bennett, as a senior beneficiary of the trust, was entitled to receive a percentage of the dividends issued by BPC on certain stock.  BPC redeemed some of that stock but agreed to continue to pay the senior beneficiaries as though the stock had not been redeemed.  Linn did a stock exchange with BPC and agreed to honor the deemed dividends but didn't do it.Equitable Subordination  The Court described the test as follows but cautioned that a "formulaic check the box approach to subordination under the statute is impossible:"(1) a claim is for "damages," (2) the claim involves "securities," and (3) the claim "arise[s] from" a "purchase or sale" having a nexus with those securities.The Court then stated that:The most important question is this: Does the nature of the Estate's interest make the Estate more like an investor or a creditor? Because we conclude the deemed dividends gave the Estate benefits normally reserved for equity investors, we conclude subordination of all of the Estate's claims was appropriate.  The opinion goes on for several more pages but that is the gist.  If a claim involves a benefit normally reserved for equity investors, it is subject to being subordinated below the level of unsecured claims.   (Note:  Estate refers to the Bennett Estate, the claimant, and not to the bankruptcy estate).   While this approach does not seem to track with the text of Section 510(b), it does accurately reflect its purpose. Hat-Tip:  Thank you to my panel of advisors who helped me decide what to write about this week.  Don't worry.  I will get to alienation of affections next week.

How to file Bankruptcy in Philadelphia by a Top Rated Philadelphia Bankruptcy Lawyer Individuals and couples come to our office to file for Bankruptcy. Based on their situation, we advise them on whether Chapter 7 Bankruptcy, Chapter 13 Bankruptcy or no Bankruptcy is in their best interest. When filing for Bankruptcy protection, we can also advise which day of the month is the best day to file for Bankruptcy and bring the Automatic Bankruptcy Stay into effect. The following is the typical process of filing for Bankruptcy: 1. Gather Information of Creditors and Your Assets Get the information of the creditors to whom you owe money and your income information, as well as a list of any assets that you have and the appropriate information on them. We always get a copy of the Credit report showing who your creditors are. We also put together a list of all your assets as well as any liabilities (debts) that you have outstanding. 2. Complete Credit Counseling Before you file for Bankruptcy, you are required under the U.S. Bankruptcy Code to complete credit counseling with only very limited exceptions to the Credit Counseling requirements. This type of counseling is usually less than an hour long and can be done on the phone or the computer. The brief session reviews your financial situation and discusses options for dealing with your debt that usually confirms that Bankruptcy is your best option. 3. Complete the Bankruptcy Petition Complete the Bankruptcy Petition whether you are filing for protection under Chapter 7 Bankruptcy or under Chapter 13 Bankruptcy. There are over 20 different forms which total over 60 pages which need to be properly completed. There is a Voluntary Petition asking the Court to give you Bankruptcy protection where you must state if you are a renter and if you have filed for Bankruptcy within the last 8 years. The Schedules are as follows: Schedule A and B – a list of your real estate and personal assets, Schedule C – a list of your exemptions, Schedule D – a list of your secured debt, Schedule E – a list of your priority debt such as taxes, Schedule F – a list of your general unsecured debts, Schedule G – covers pending contracts and unexpired leases, Schedule H is a list of Co-Debtors or any Co-Signers that you have also signed for a debt, Schedule I – a list of your monthly Income and Schedule J is a list of your monthly expenses. You need to sign a form that the Schedules are true to the best of your knowledge. There is the Statement of Financial Affairs where you answer questions about finances, assets and any business you have. Next is the Summary of your assets and liabilities showing the total of your assets and debts. When filing a Chapter 7 you fill in a Statement of Intention regarding what you intend to do with your mortgage, car or other secured debt. When filing a Chapter 13 Bankruptcy you file a Repayment Plan instead. In addition, when filing Chapter 7 you must file a Current monthly income and Chapter 7 means test. This shows if you if your income and expenses justify you getting relief under Chapter 7. If you file for Chapter 13 you must file the Statement of Current Monthly Income and Expenses which shows if you are able to afford to pay back your creditors, Lastly, there are forms where you fill in your social security number and another form called a matrix that the Court uses to mail notices of your Bankruptcy filing to all of your creditors. 4. Go to U.S. Bankrupcty Court The U.S. Bankruptcy Court in Philadelphia is located at 900 Market Street. This is the physical location where any type of Bankruptcy case is filed whenever Chapter 7 Bankruptcy, Chapter 11 Bankruptcy or Chapter 13 Bankruptcy is filed in Philadelphia. When an attorney files the bankruptcy, it is filed online. A case number is given immediately upon the filing of the case and that is the case number you give to creditors who are now prohibited from contacting you. The Automatic Stay from the Bankruptcy filing now protects you. 5. A Trustee Reviews Your Case After filing, a trustee is appointed to review your case. The trustee is appointed whether you file for Bankruptcy relief under Chapter 7 or Chapter 13. Your Bankruptcy Lawyer supplies the Trustee copies of documents such as proof of your income, your bank balance statements, your last filed tax return (if you file taxes) and other documents regarding your assets and debts. 6. The Meeting of Creditors In Philadelphia, when you file for Bankruptcy protection, the meeting of creditors, also known as The Section 341(a) meeting required under Title 11 of the United States Bankruptcy Code is usually scheduled within 30-40 days. 7. Take Debtor Education Classes Take the second Bankruptcy course, also known as a debtor education or financial management class. This course is taken on the phone or online. You will be issued a Certificate showing you have completed the session. Try to take this class prior to the meeting of creditors. 8. Section 341(a) Meeting of Creditors This is where your attorney goes with you to meet your trustee. The trustee will ask questions to confirm that the Bankruptcy Petition is accurate. The trustee is looking to confirm that the information about your income, expenses, assets and liabilities is correct. He or she also looks to ensure that you have no valuable assets that you are trying to hide and that you have not transferred your property to friends or relatives. The meeting of creditors usually takes about 10-15 minutes. You must have a Government issued photo ID and proof of your social security number in order for the meeting to be held. a) At the conclusion of a Chapter 7 Meeting of creditors, the trustee will usually recommend a discharge if there are no issues. If the trustee has a question, he may ask for more documentation or in some cases continue the hearing. If the trustee finds no assets, he will file a report indicating no assets and issue a recommendation for a discharge. If there are no objections filed, the Bankruptcy Judge will usually enter a discharge approximately 60-75 days after the meeting of creditors. b) In a Chapter 13 case, the trustee will indicate anything else your lawyer should do with your case or if there is any need to change your repayment plan. Your Bankruptcy Lawyer will update the repayment plan to cover the allowable claims which are owed. If creditors object to your plan, it usually relates to a mortgage or car loan you want to keep that is not being correctly paid. Your Bankruptcy Attorney will then file an Amended Plan so that your plan matches what you owe. Once the Trustee is satisfied with your plan, the Trustee issues a recommendation to approve the plan, which the Court typically accepts. The Bankruptcy Judge then issues an Order confirming which means the Court is approving the plan. The post What Are the Steps for Filing Bankruptcy in Pennsylvania? appeared first on David M. Offen, Attorney at Law.

Franchise Services of North America v. United States Trustee (In re Franchise Services of North America), 891 F.3d 198 (5th Cir. 5/22/18)This is easily the most important case of the quarter.   It involves whether a debtor may circumvent normal corporate governance provisions to file a voluntary petition.   In this case, the answer was no.The Debtor purchased Advantage Rent-A-Car from Hertz.   The Debtor engaged an investment bank to help with the transaction.   The investment bank invested $15 million in the Debtor and received preferred stock.  The Debtor re-incorporated in Delaware and included a provision in its charter that it could not engage in a "liquidation event" without the consent of the preferred shares.  The Debtor also agreed to pay the investment bank $3 million.The Debtor filed Chapter 11 without seeking the approval of the preferred shareholder.   The Debtor's theory was that this arrangement was similar to a "golden share" provision whereby a creditor would receive a blocking position as part of its loan transaction.   The preferred shareholder moved to dismiss.    The Bankruptcy Court granted the Motion to Dismiss but authorized a direct appeal to the Fifth Circuit.The Fifth Circuit declined to answer the question as to whether "golden share" provisions were against public policy because the arrangement in this case was not a "golden share" transaction.  Instead, the investment bank invested $15 million into the Debtor and received preferred shares.   While there were fees outstanding which made it a creditor, those fees were separate and apart from the preferred share transaction.  As a result, the Fifth Circuit held that the Debtor could not circumvent its corporate documents and file a voluntary bankruptcy petition without the approval of the preferred shareholder.Century Surety Company v. Seidel, Trustee, 2018 U.S. App. LEXIS 17252  (5th Cir. 6/25/18)This was an insurance coverage dispute which arose in the context of a bankruptcy.   The owner of a restaurant gave alcohol and a date rape drug to an 18 year old girl.  He subsequently sexually assaulted her off-premises.    She sued the restaurant, among others, for providing her with alcohol.   The restaurant filed for chapter 11 and confirmed a plan creating a creditors' trust.   After a verdict against the restaurant, the plaintiff intervened in an insurance coverage declaratory judgment action.  The District Court granted summary judgment because the policy had a criminal acts exclusion.  Providing alcohol to a minor was a criminal act and therefore not covered.Deeprock Venture Partners, LP v. Beach (Matter of Beach), 2018 U.S. App. LEXIS 13029 (5th Cir. 5/16/18)(unpublished)A bankruptcy trustee and the largest unsecured creditor in the estate sued the debtor and his son for fraudulent transfers.  Following mediation, the trustee settled with the defendants.  Under the settlement, the estate would receive $1,015,000 and the debtor would waive his discharge.  The unsecured creditor objected but the bankruptcy court approved the settlement.    The Fifth Circuit, after considering the probability of success in litigating the claims, the complexity and expense of litigation and  other factors bearing on the wisdom of the settlement, found that the Bankruptcy Court did not abuse its discretion in approving the settlement.Fallon Family, LP v. Goodrich Petroleum Corporation (Matter of Goodrich Petroleum Corporation), 2018 US. App. LEXIS 17661 (5th Cir. 6/27/18)The Fallon Family and Goodrich Petroleum had a dispute over the validity of a mineral lease.  The parties settled and recorded a ratification of lease.   The ratification recited that good and sufficient consideration had been paid for the settlement.   Goodrich filed bankruptcy and the Fallon Family attempted to dissolve the settlement based on non-payment.   The Debtor successfully invoked its right to be considered as a good faith purchaser under 11 U.S.C. Sec. 544.   Because the recorded ratification stated that good and sufficient consideration had been paid, the ratification could not be undone based on non-payment.Furlough v. Cage (Matter of Technicool Systems Incorporated), 2018 U.S. App. LEXIS 16852 (5th Cir. 6/20/18)The first two paragraphs of this opinion written by newly-minted Fifth Circuit Judge Don Willett say all that needs to be said about this case:In bankruptcy litigation, the mishmash of multiple parties and multiple claims can render things labyrinthine, to say the least. To dissuade umpteen appeals raising umpteen issues, courts impose a stringent-yet-prudent standing requirement: Only those directly, adversely, and financially impacted by a bankruptcy order may appeal it.This appeal is from a bankruptcy court order approving a trustee's application to employ special counsel. Appellant Robert Furlough, owner of the Debtor, Technicool Systems, objects to Trustee Lowell Cage's application to employ Stacy & Baker, P.C. (SBPC), alleging that SBPC holds an interest "adverse to the estate" under 11 U.S.C. § 327(a). Both the bankruptcy court and the district court held that Furlough lacked standing to object. We agree. Furlough's indirect interest in the order fails to meet the strict requirements for bankruptcy standing. Because the order does not reach his wallet, he cannot reach this court.Judge Willett's statement that "Because the order does not reach his wallet, he cannot reach this court" is one of the most concise definitions of standing that I have seen.Valentine v. JP Morgan Chase Bank (Mater of Valentine), 2018 U.S. App. LEXIS 15957 (5th Cir. 6/14/18)(unpublished)The Bankruptcy Court entered an order lifting the automatic stay.  The debtor filed a notice of appeal and an amended notice of appeal.   The debtor did not pay the filing fee or order the transcript.  The district court gave the debtor a notice of delinquency.   The debtor filed a motion to proceed in forma pauperis with a notarized affidavit.   The district court informed the debtor that she would need to use the prescribed form for an IFP motion or her appeal could be dismissed.   The debtor did not do so.  The case was dismissed.   The Fifth Circuit affirmed the dismissal.OHA Invs. Corp. v. Schlumberger Tech. Corp. (In re ATP Oil & Gas Corp.), 888 F.3d 122 (5th Cir. 4/17/18)This case dealt with liens under the Louisiana Oil Well Lien Act.    The Court found that a safe harbor provision in the Act extinguished the liens.   Specifically, the Court found that the Louisiana statute provided that the liens did not apply to a party that purchased an overriding royalty interest.   While the court took fifteen pages to resolve the statutory question, it ultimately relied on the principle that  "If the statutory text is unambiguous, our inquiry begins and ends with the text."

Compromises are favorites of the law.   A compromise and settlement can avoid expensive litigation and as more than one judge has pointed out, the deal that the parties make will generally be better for them than the ruling the court provides.  However, bankruptcy involves many stakeholders so that when two parties reach a settlement which affects rights of the estate, the parties must go to the court for approval of their compromise under Fed.R.Bankr.P. 9019.   In submitting motions to compromise, the cases and standards are well-established.  My standard 9019 motion refers to the four factor test set out in  In re Cajun Electric Power Coop, Inc., 119 F.3d 349, 355-56 (5th Cir. 1997) and many other Fifth Circuit decisions.   Most opinions dealing with motions to compromise relate to settlements which were approved which is great help if you are on the compromising side, but not so much on the objecting side.    Bankruptcy Judge Ronald B. King who is notoriously reticent to publish, has provided an opinion demonstrating when a settlement should not be approved.   Case No.  16-51448, In re Jorge R. Alfonso and Naydimar Diaz (Bankr. W.D. Tex. 9/6/09), which can be found here.What HappenedThe Alfonso case involves a variation on a common theme.   A debtor files bankruptcy and failed to list a possible personal injury claim.   Shortly before the discharge was obtained, the debtor hired a law firm to file a lawsuit.   The PI firm ran a search to see if the potential plaintiff was in bankruptcy but did not find the case.   Suit was filed against Ms. Diaz's employer, Nordstroms and the case went to arbitration.  During the arbitration, Nordstroms learned of the bankruptcy and moved to dismiss.  At this point, the plaintiff's lawyer, continuing to do everything right, contacted the trustee, who moved to reopen the bankruptcy case.   After the case was reopened, the debtors amended their schedules to disclose the claim.  Ms. Diaz claimed her maximum exemption of $23,675 in the lawsuit which was allowed after an objection from the trustee.       The Trustee discussed employing the PI firm to represent him in pursuing the claim.   However, the Trustee decided instead to accept a settlement offer from Nordstroms.    The Trustee filed a motion to compromise which proposed to settle the claim for $105,000.   The law firm objected, pointing out that the claim was worth between $500,000-$1.5 million.   In fact, Ms. Diaz had medical expenses of over $367,000, most of which were the subject of letters of protection.There were claims of just over $120,000 in the estate, which meant that creditors would receive a sizable distribution but would not be paid in full.  Most of the filed claims were for student loans which would not be dischargeable.   Therefore, the losers under the trustee's proposed settlement were the law firm, which would miss out on its contingent fee, the medical expense providers who had letters of protection and the debtors and their student loan creditors.   The big winner would be Nordstoms and, to a lesser extent, the trustee.The RulingJudge King succinctly laid out the standards for approving a compromise as follows:A bankruptcy court has wide discretion to approve or deny a settlement proposed by a trustee. See id.; see also Nellis v. Shugrue, 165 B.R. 115, 122 (S.D.N.Y. 1994) (citing Sec. & Exch. Comm’n v. Drexel Burnham Lambert Grp., Inc. (In re Drexel Burnham Lambert Grp., Inc.), 960 F.2d 285, 293 (2d Cir. 1992)) (“The experience and knowledge of the bankruptcy court judge is of significance in assessing the propriety of the settlement.”). But the Fifth Circuit instructs courts to do so “only when the settlement is fair and equitable and in the best interest of the estate.” Conn. Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortg. Corp.), 68 F.3d 914, 917 (5th Cir. 1995) (citing Rivercity v. Herpel (In re Jackson Brewing Co.), 624 F.2d 599, 602 (5th Cir. 1980)). To determine whether a settlement is fair and equitable, courts compare the terms of the compromise with the likely rewards of litigation, by evaluating:• (1) the probability of success in litigating the claim subject to settlement, considering the attendant uncertainties in fact and law;• (2) the complexity and likely duration of litigation and any attendant expense, inconvenience, and delay, if any, to be encountered in the matter of collection;• (3) the best interests of the creditors, with proper deference to their reasonable views;• (4) the extent to which the settlement is truly the product of arms-length bargaining, and not of fraud or collusion; and• (5) all other factors bearing on the wisdom of the compromise. Cajun Elec. Power Coop., Inc. v. Central La. Elec. Co. (In re Cajun Elec. Power Coop., Inc.), 119 F.3d 349, 356 (5th Cir. 1997) (citing Foster Mortg., 68 F.3d at 917); Jackson Brewing, 624 F.2d at 602.As counsel for Nordstrom argues, a court need not “conduct a mini-trial to determine the probable outcome of any claims waived in the settlement.” Official Comm. of Unsecured Creditors v. Moeller (In re Age Ref., Inc.), 801 F.3d 530, 540 (5th Cir. 2015) (internal citation omitted). Instead, the court is to “canvas the issues” to see if the settlement falls “below the lowest point in the range of reasonableness.” ARS Brook, LLC v. Jalbert (In re ServiSense.com, Inc.), 382 F.3d 68, 72 (1st Cir. 2004).But while a bankruptcy court should not hold a full-blown trial on the merits, it must “apprise [itself] of the relevant facts and law so that [it] can make an informed and intelligentdecision” on whether the settlement proposed is fair and equitable to parties in interest. Age Ref., 801 F.3d at 541 (alterations in original) (quoting Cajun Elec. Power Coop., 119 F.3d at 356); see also LaSalle Nat’l Bank v. Holland (In re Am. Reserve Corp.), 841 F.2d 159, 163 (7th Cir. 1987). In other words, the court must do more than “rubber stamp” a settlement. See Nellis, 165 B.R. at 122 (“The bankruptcy judge is ultimately responsible for an unbiased and informed assessment of a settlement’s terms.”); Cousins v. Pereira (In re Cousins), No. 09 Civ. 1190(RJS), 2010 WL 5298172, at *4 (S.D.N.Y. Dec. 22, 2010) (holding that “[trustee’s] opinions are not to be automatically accepted as reasonable” and that the “bankruptcy court must make independent determinations in approving a settlement”). Opinion, pp. 6-7.  I set this out at length not because I am too lazy to summarize them, but because Judge King provides a great resource on cases and points to argue when supporting or opposing a compromise.In making his ruling, Judge King summarized the evidence and arguments of the two parties.  The Plaintiff's firm  established that it had extensively prepared for the arbitration hearing, identified facts that would establish liability, asserted that Ms. Diaz had "excellent facts for proving damages" of at least $367,828.87 representing her medical expenses and provided a "well-supported" estimate of a settlement figure closer to $750,000.   On the other hand, the Trustee and Nordstrom provided more general statements in favor of settlement.Judge King explained:Likewise, the trustee presents no evidence as to how or why $105,000 is a reasonable number for settlement. As the Firm pointed out, most of the trustee’s motion to approve the settlement contains generalizations and legal conclusions. See ECF No. 35, pp. 5–7. Thus, when comparing the Firm’s intensive investigation into both legal and factual issues to the figure proposed by the trustee, the second factor (i.e., complexity and likely duration of litigation) and third factor (i.e., best interest of creditors) also weigh against the Proposed Settlement—or at least do not support the trustee’s argument to approve it. Opinion, p. 9.    The Court thus left the parties to either litigate or propose an alternative settlement.The practice point here is that when supporting or opposing a compromise, the party who provides specific facts will have an advantage over the party offering platitudes.   One danger for a trustee is that if he proposes a settlement based on weaknesses in his case and the settlement is not approved, the trustee will have given the opposing party a roadmap to defeat the claim.

From: The New York TimesBy: Brian M. Rosenthalhttps://www.nytimes.com/2019/09/27/nyregion/AOC-taxi-medallion-bailout.html

Mistakes You Should Dodge When Seeking Debt Relief Falling into serious debt can make you feel stressed and overwhelmed. You may feel like you’re working harder and harder, but you aren’t getting anywhere. You can start to feel like you’ll never see the end of your debt, which can make you feel desperate. When you’re desperate, you’re in the worst place you can be. You won’t think clearly, and you’ll be more likely to make bad decisions – the kind of decisions that can make your situation even worse. Even if you don’t know what to do to get out of debt, you can do a lot to help yourself just by knowing what not to do. Here are a few of the mistakes you should try to dodge when you are trying to find debt relief: Prioritize Unsecured Debt Credit cards carry ridiculous interest rates, which causes their balances to go up fast. When you owe a lot of money to credit cards, it can feel like you aren’t making a dent in your balance because of the interest. So, you might start putting as much money as you can to paying them off. However, doing so is a big mistake. Funneling all your money to your credit cards means you have less money to pay for other things. That means that you might need to take out more credit card debt just to pay for your essentials. It also means that you might not have enough money to pay for your secured debts, such as your home or auto loan. If you fall behind on these secured debts, your lenders can actually come for what you have, such as foreclosing on your home or repossessing your car. Your problems will be exponentially worse if you don’t have a car to drive or a place to live. Always prioritize your secured debt payments over your unsecured debt payments. Unsecured creditors typically don’t have much recourse other than to harass you until you can’t take it anymore and pay off. Taking Out Loans When you don’t have the money to pay your creditors, you may look for other ways to pay, such as by asking friends for money or by taking out a loan. You may think that you just “need a little help” until the next paycheck, or until you get that raise you expect, or until you get that better job. The trouble with this strategy is that you can’t count on any of those things happening. You have to learn how to better manage the money you have right now. Taking out a loan will only compound your debt problem. Unsecured loans like payday loans have excessive interest rates and fees, and they will drive up your debt fast. Just avoid taking on more debt and look for other forms of debt relief. Give in to Creditor Pressure The calls may never seem to end when you owe money to creditors. You will start to feel like you’ll do anything just to get the harassment to end. You may give in and just offer everything you have to the creditor who is harassing you the most. But then you don’t have money to pay your other creditors, and another debt may have been more pressing. It’s important that you assess your debt objectively so that you can make a strategic plan that will benefit you the most. You can do that if you make decisions in the spur of the moment because of pressure from a creditor. Don’t make any of these mistakes when you are trying to get a handle on your debt. Instead, talk to professionals like a financial counselor or an attorney to learn about the best strategies. In many cases, filing for bankruptcy can bring you maximum debt relief, allowing you to get the fresh start you need more quickly. If you are mired in debt, call My AZ Lawyers to learn how filing for bankruptcy may be able to help you. If you qualify, filing for Chapter 7 bankruptcy may result in a discharge of all your unsecured debts, or filing for Chapter 13 may put you on a more affordable repayment plan so you can pay your debts and get control of your finances. Call our bankruptcy law office today to review your finances and explore your options for debt relief. Published By: 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 Office: (623) 399-4222 The post Mistakes You Should Dodge When Seeking Debt Relief appeared first on My AZ Lawyers.

For many people in Pennsylvania, filing for bankruptcy is a way to relieve themselves from certain forms of debt and move ahead with a clean slate. Filing for bankruptcy is a good option for many people, but it can have some negative consequences, such as lowering credit scores. Some people that have declared bankruptcy may […] The post Can You Buy a Home in Pennsylvania If You File for Bankruptcy? appeared first on .

The Fifth Circuit has released a new opinion which underscores just how hard it is to discharge a student loan under the undue hardship standard.   Thomas v. Department of Education (In re Thomas), 931 F.3d 449 (5th Cir. 2019).    A Sympathetic DebtorVera Thomas wanted to improve her station in life.  She was working at a call center in Southeastern Virginia earning $11.40 per hour with benefits.  In 2012, she decided to enroll in a local community college.   She took out two loans for $3,500.00 each for her first two semesters.   She did not return for a third semester and her loans went into repayment.   In spring of 2014, she paid back about $82 on her loans.Here is what happened next as told by Judge Edith Jones:Ms. Thomas's health began to decline significantly in 2014 when she was diagnosed with diabetic neuropathy. The condition, which often reduces circulation in patients' lower extremities, caused muscle weakness, numbness, and pain in her legs and feet after prolonged standing. Ms. Thomas frequently took unpaid leave from work at the call center to manage her symptoms and incurred significant medical expenses. In 2016, her employer was acquired by another company, and the new employer fired her for violating company policies. Because she was terminated for cause, Ms. Thomas was ineligible for unemployment benefits. 931 F.3d at 440.    Ms. Thomas moved in with her then-boyfriend and held some jobs with Perfumania, Whataburger and UPS.   She was not able to keep these jobs because they required her to be on her feet.    She filed Chapter 7 bankruptcy on March 24, 2017.   At that time, she was 60 years old and survived on a combination of public assistance and private charity.   She qualified for an in forma pauperis filing and was represented by Noah Schottenstein, an attorney with Baker Botts who represented her pro bono.  She sued to have her student loans discharged as an undue hardship.   Her case was heard by the well-regarded Judge Harland D. "Cooter" Hale.  Unfortunately, Judge Hale found that she did not qualify for an undue hardship.   She appealed to the District Court which affirmed.     At the Fifth Circuit, Ms. Thomas continued to be represented by pro bono attorneys Tatiana Sainati with Wiley Rein in Washington D.C. and Stephanie Barnes with Siebman Forrest in Plano.  Ms. Thomas had amicus support from Tara Twomey representing the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys.   With all this legal firepower on her side, surely Ms. Thomas would prevail at the Fifth Circuit level, right?  Unfortunately, the Brunner test was too much for her.The Fifth Circuit's Ruling Under 11 U.S.C. Sec. 523(a)(8), student loans are non-dischargeable unless the debtor can show that not discharging them would impose an undue hardship on the debtor and dependents.   The Fifth Circuit, along with most circuits other than the Eighth (more on that later), follows the Brunner test.   Brunner requires the debtor to prove (1) that the debtor cannot maintain, based on current income and expenses, a 'minimal' standard of living for [herself] and [her] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.  931 F.3d at 451.Judge Hale found--and the Fifth Circuit agreed--that Ms. Thomas satisfied the first prong.  Her income of $194 per month and expenses of $640 per month did not allow her to pay her student loans.  However, Judge Hale found--and the Fifth Circuit agreed--that she did not meet the second prong of the test.   The Fifth Circuit explained that the exceptionally demanding second prong of Brunnerrequires more than a showing of dire financial straits because the debtor must show that circumstances out of her control have resulted in a "total incapacity" to repay the debt now and in the future.Id.   The Court found that the debtor did not meet this standard. The answer to this question must be negative. Ms. Thomas's argument that she meets the second Brunner prong is contradicted by the record. Foremost, she is, by her own admission, capable of employment in sedentary work environments. Second, her actual employment experience demonstrates that after losing the call center job, she was hired by three different employers, although she quit when they were unable to accommodate her need to remain sedentary for periods of time during her shifts. Finally, she lost her job at the call center not because of physical problems beyond her control but for a violation of company policies.In sum, there is no evidence that Ms. Thomas's present circumstances, difficult as they are, are likely to persist throughout a significant portion of the loans' repayment period. Under the standard  adopted by this court and the vast majority of other circuit courts, Ms. Thomas is not eligible for a discharge of her student loans.931 F.3d at 452-53.   This ruling seems rather callous.   Ms. Thomas suffers from a medical condition.  She has been unable to hold a job.  However, maybe, somehow, this will change in the future and allow her to pay the loans.   In the words of The Princess Bride,  “Life isn't fair, it's just fairer than death, that's all.” Can Anyone Who Is Not in a Coma Meet the Test?One of the interesting aspects of the opinion was that the Fifth Circuit noted that Bankruptcy Judge Hale, who tried the case, stated that in fifteen years on the bench, he had never discharged a student loan over the objection of the lender.  Judge Hale is not an unfair judge so that got me wondering whether anyone who is not in a coma can meet the test.  I did a LEXIS search for cases decided between 2017-2019 which directly ruled on the undue hardship standard.  I found seventy decisions.   The debtor completely prevailed in eleven cases, received a partial discharge in six cases and lost in fifty-three cases.  Thus, the debtor's chance of receiving at least partial relief was 24% which is more than 0%.So who are the debtors who received undue hardship discharges? In one case, a debtor who had never earned enough to make payments on her student loans was diagnosed with Bipolar Type I disorder with psychotic features and post-traumatic stress disorder.   Understandably, she was not able to work and her sole source of income was SSDI.  Hill v. Educ. Credit Mgmt. Corp. (In re Hill), 598 B.R. 907 (Bankr. N.D. Ga. (2019).   My biggest question about this case is why the lender could oppose the discharge with a straight face. Another debtor succeeded in getting an undue hardship discharge where he had suffered from a bi-polar manic depressive disorder for over 20 years and his illness made it hard for him to read and write.   Pierson v. Navient (In re Pearson), 2018 Bankr. LEXIS 3106 (Bankr. N.D. Ohio 2018).    Finally, a hardship discharge would be granted where a debtor's payment under an Income Based Repayment plan ("IBR") would be $0 and the debtor would be taxed on the forgiven debt at the conclusion of the IBR.    Murphy v. United States (In re Murphy), 2018 Bankr. LEXIS 1598 (Bankr. D. N.M. 2018).On the other hand, there are cases where debtors receive a hardship discharge despite the fact that they look very similar to debtors who were denied one.  Educational Credit Management Corp. v. Murray (In re Murray), 2017 U.S. Dist. LEXIS 155043 (D. Kan. 2017) is a case where the District Court affirmed a Bankruptcy Court's ruling allowing an undue hardship discharge.   The Debtors had disposable income of $1,658 per month and testified that they could afford to pay between $200-$500 per month on their student loans.   The debtors were in their 40s and were "potentially settled into the jobs they will hold for the rest of their careers."   To fully pay off their student loans would require payments of $2,614-$3,945 per month, sums which exceeded their disposable income.   They could also have entered into an IBR which would require them to pay $605-$907 per month and would leave them with a tax bill at the end of twenty-five years.    However, the record does not show that the debtors established that they could not potentially win the lottery or be adopted by Oprah.   Therefore, the mere fact that it was implausible that they would ever be able to pay off their student loans didn't mean that it was impossible.   Totality of the CircumstancesThere is one more twist.  The Eighth Circuit follows what is known as the "totality of the circumstances" test.   Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702 (8th Cir. 1981).    On its face, totality of the circumstances looks similar to Brunner:   In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider: (1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. (citation omitted). Simply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt-while still allowing for a minimal standard of living-then the debt should not be discharged. Certainly, this determination will require a special consideration of the debtor's present employment and financial situation-including assets, expenses, and earnings-along with the prospect of future changes-positive or adverse-in the debtor's financial position.Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).  However, at least in my limited survey, totality of the circumstances vs. Brunner, makes a big difference in result.    When I looked at totality of the circumstances separate from other cases, there were five cases where relief was granted and five where it was denied, a 50% success ratio.  Looking only at the Brunner-based cases,  there were six complete discharges, six partial discharges and 48 cases where no relief was granted, representing a 20% chance of partial or complete discharge.   My examination of seventy cases is by no means definitive.  However, it strongly suggests that debtors are not fighting on a level playing field depending on whether they file in the Eighth Circuit or the rest of the country.   This is a promising research subject for a younger Warren & Westbrook.Concluding RantSection 523(a)(8) is broken.   A debtor should not have to demonstrate psychosis to discharge a student loan.   It seems absurd to me that a court could conclude that a 60 year old woman with diabetic neuropathy presently earning $194 per month would somehow be able to pay her student loans some day.  Inconceivable!    It also seems blatantly unfair to me that a debtor's chance of discharging a student loan varies dramatically depending on where a case is filed.  That seems to violate the Constitution's requirement that we have uniform bankruptcy laws. I see two ways out of this dilemma.   One is that the Supreme Court could resolve the split in circuits.  I do not have great confidence that the current court will do so in a way that helps people discharge their student loan debts.  The second is that Congress can get us out of this mess.   Congress dropped "undue hardship" into the Code without telling us what they meant.  At the time, undue hardship was one of two ways to discharge a student loan so that if someone couldn't meet a difficult undue hardship standard they could still receive a time-based discharge.   The current bills pending in Congress would repeal Section 523(a)(8) altogether.  That is not realistic.   What we need is a bill narrowly targeting undue hardship discharges.   Post-ScriptAlthough the attorneys in the Thomas case were not successful, they deserve our thanks.  Pro bono and amicus curiae attorneys are valuable friends of the law.     

   The bankruptcy court in In re Everhart, 2019 Bankr. LEXIS 2892, Case #18-31896-MCM (Bankr. N.D. Tex, Sept 17 2019) overruled almost all of the chapter 13 trustee's objections to the Debtors' plan based on the means test.  The Everharts filed chapter 13 bankruptcy on May 10, 2018.  Their form 122C-1 showed they were above median income, and 122C-2 reflected disposable income of $436.26, resulting in a proposed distribution to unsecured creditors in their plan of $26,175.60.  Shortly before confirmation, the Everharts amended schedules I, J, and 122C reducing their disposable income to $234.15 and distribution to unsecured creditors to $14,049.  Judge Mullin examined each area on the objection in turn.  The trustee had objected that the Everharts failed to reduce the tax liability on form 122C-2 by the amount of the tax refund.  Given the 2017 tax refund of $4,963, the trustee argued for a $246.92 reduction in line 16 of the means test for tax withholding.  Ruling for the Everharts, the Court accepted the Everharts' assertion that they do not expect a refund in the future in that the 2017 refund was unusual due to expenses related to the birth of their child.  The trustee also objected to a $50 expense for optional telephone services on line 23 of form 122C-2.  The Court accepted the Everhart's testimony that enhanced services, such as text messaging capability and other applications on her cell phone are necessary for her employment with the school district, as she needs to be accessible throughout the entire school district.  Also, Mr. Everhart's employment as a computer systems integration administrator requires him to work from home, necessitating higher internet speed, increased bandwidth, and greater storage capacity than is provided in basic cell and internet services.     The Court went in somewhat more depth in analyzing the trustee's objection asserting that the Debtor is only entitled under §707(b)(2)(A) to the applicable monthly allowed expense for mortgage and car payments as specified in the local standards. The applicable statute reads:Section 707(b)(2)(A)(ii)(I) provides, in pertinent part:The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor . . . . Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.Section 707(b)(2)(A)(ii)(V) further provides, in pertinent part:In addition, the debtor's monthly expenses may include an allowance for housing and utilities, in excess of the allowance specified by the Local Standards for housing and utilities issued by the Internal Revenue Service, based on the actual expenses for home energy costs if the debtor provides documentation of such actual expenses and demonstrates that such actual expenses are reasonable and necessary.        Section 707(b)(2)(A)(iii), on the other hand, provides in pertinent part:The debtor's average monthly payments on account of secured debts shall be calculated as the sum of—(I) The total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the filing of the petition; and(II) Any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's . . . motor vehicle . . . necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts; divided by 60.The Court looked to §707(b)(2)(A)(ii) goes on to provide 'Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.'  Thus, debtors can deduct the full contractual payment on both mortgage and car loans, but shall deduct such payments from the allowances, which result in a $0 allowance when the  contractual payment is higher than the allowance.  The Judge found that the trustee misapplied clause (iii) in arguing that the allowable mortgage expense is limited to the maximum allowance under the local standards.  Rather, clause (iii) addressing a debtor's actual mortgage debt payment is separate and apart from local standards referred to in clause (ii).  This interpretation is supported by the instructions in Form 122C-2 itself, which the Court found to be usable as an advisory opinion on how to interpret the code.   The same analysis applies as to the vehicle payments.    The Everharts claimed a number of expenses on line 43 for special circumstances.  The Court approved the $154.65 deduction for repayment of a 403(b) retirement loan.  If such repayment were not made, debtors would incur a significant tax penalty for early withdrawal, but did require that the Everharts provide documentation of the expense.     Debtors also asserted a $384.91 special circumstance expense for housing and utilities, including itemized expenses for home insurance, maintenance, repair and upkeep, electricity, water, sewer, garbage, telephone, internet, and cell phone.  The Court sustained the trustee's objection as to $60 bi/weekly lawn mowing service despite debtor's one acre lot, given that Mr. Everhart used to mow the lawn until their mower broke down, and that this was the sole reason they did not mow their own yard.  The Court accepted the Everharts' testimony that other deductions were reasonable and necessary, and that the Everharts had no other reasonable alternatives to the requested deductions.   The Everharts likewise itemized their vehicle expenses, requesting an additional $81 as special circumstances.  They testified that they lived in a rural area and had to travel 15-30 miles one way to acquire groceries, clothing, and household goods.  The Court appeared to generally approve of the Debtor's use of the special circumstances means test category to match the I and J expenses, to the extent that such expenses were reasonable.Michael BarnettMichael Barnett, PA506 N Armenia Ave.Tampa, FL 33609-1703813 870-3100https://hillsboroughbankruptcy.com