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Sua Sponte

Alan I. Nahmias - Immediate Past Chair
Plotkin, Rapoport & Nahmias
anahmias@prnlaw.com

While I find it hard to believe that a year has gone by, the fact that I have just returned from the Commercial Law League's 111 th Annual Conference in Toronto confirms it's true. So much has gone on in the past year that perhaps we have all been too busy to realize that time has been passing at such speed.

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Case Analysis

Faye B. Feinstein
Quarles & Brady, LLP
fbf@quarles.com

Ninth Circuit B.A.P. Sets Standards for Attorney Fee Awards

Summary: In Movitz v. Baker, 324 B.R. 778 (9th Cir. B.A.P. 2005), the Bankruptcy Appellate Panel for the Ninth Circuit held that attorney's fees cannot be awarded until (i) complete and accurate disclosure is made of potential conflicts, including the receipt of potentially avoidable pre-petition transfers; and (ii) the court determines whether counsel was the recipient of avoidable preferential payments.

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Case Law Update

Paige E. Barr
Paige E. Barr
Jaffe Raitt Heuer & Weiss
pbarr@jaffelaw.com

Congress Acted within its Power to Enact Section 110. Appellant was a non-lawyer bankruptcy petition preparer under § 110. Appellant was found to have engaged in unfair and deceptive acts and the unauthorized practice of law, collected a fee for filing the petition in violation of the law, and charged an excessive fee.

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Sua Sponte

While I find it hard to believe that a year has gone by, the fact that I have just returned from the Commercial Law League's 111 th Annual Conference in Toronto confirms it's true. So much has gone on in the past year that perhaps we have all been too busy to realize that time has been passing at such speed.

I am pleased to be able to say, although almost exclusively through the efforts of others, that I am turning over the Chairpersonship of the Section to Cathy Pike at a time when the Section is in the strongest financial position it has been for some time. Concurrent with our improved financial condition, there appears to be a rededication of the Section's members, including all members of the Executive Council, toward continuing to keep our Section at the forefront of dealing promptly and professionally with all bankruptcy and insolvency matters that present themselves and require our attention from time to time.

This past year, the most obvious of these matters was the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("Act"). Although arguably one of the worst pieces of legislation enacted by Congress in recent years, key members of our Section, under the care and guidance of Sarah Jolie and the insight and advice of David Goch, counsel to our Section and the CLLA, used the opportunity to assemble not only first-rate written materials, but first rate presentations on the new legislation and the impact it will have on all of us. Not only did Jay Welford, Judy Miller and Cathy Vance present, along with the Honorable Eugene Wedoff, the first in-depth programs on the new legislation in Chicago at the CLLA's Midwestern Conference in April, but Jay, Judy, Cathy and Peter Califano then took matters further by conducting several conference call seminars on the Act, all of which were tremendously well received, in addition to being highly profitable. On behalf of our entire Section, I extend my full thanks, appreciation and congratulations to each of you for playing such a pivotal role in educating fellow practitioners about legislation that has already begun to affect each one of us and will continue to do so, possibly for years to come.

As I mentioned above, David Goch was a key contributor to the success of our Section's and the CLLA's broad visibility on this legislation. David's tireless efforts in bringing us minute-by-minute accounts of the passage of the Act were invaluable to our members and will long be remembered by all who read the many emails the moment they came in

The CLLA's Chicago conference also proved to be a watershed for our Section in that we held our first Future Planning Conference in many years. It was co-chaired by Alan Ramos and Jay Welford, both of whom did an outstanding job in not only planning the program with facilitator Nancy Southern, but in continuing the momentum generated on that date by holding ongoing conference calls for purposes of implementing the steps which were agreed to be taken that day, thereby ensuring that our Section remains relevant and among the most-respected national trade groups in the industry. Max Moses also gave generously of his time in seeing to it that the Future Planning Conference was a success, and a huge debt of gratitude is owed to him as a result.

Cathy Vance and Alan Gordon were also busy throughout the year, planning and overseeing the presentation of numerous outstanding educational programs at our various conferences, and for that, a special thanks again to both of them. I would also be remiss if I did not thank Lou Robin for his efforts as Board Member for our Section for the past year. In addition to doing a fine job serving in that capacity, Lou was often available to offer advice to me as the immediate past Chair of our Section whenever the need arose. Thank you, Lou. It is appreciated.

I have saved my last and deepest-felt thank you for the person that, if she were not present, I believe our Section would not exist as we know it: Sarah Jolie. Prior to serving as the Chair, I had worked with Sarah and interacted with her on various Bankruptcy Section matters as a member of the Executive Council as the need arose. Upon assuming the Chairmanship of the Section, however, Sarah and I immediately began working together closely on a very regular basis, and I came to see the true intelligence, thoroughness and determination that she brings to any matter she undertakes, as well as the genuine care and affection she has for our Section. I have been fortunate enough to become someone whom I believe can call himself a good friend of Sarah's, and that, along with the new friendships I've made and the old friendships I've strengthened, has made my serving as the Chair this past year more worthwhile than I could have imagined.

Although my term as Chair has ended, my involvement in the Section has not. I look forward to continuing to split time between Board meetings, our Section's Executive Council meetings, and simply working to further the progress that has been made by our Section over the past year. Until the NCBJ's San Antonio, or the CLLA's New York conference, if not sooner, I hope that all of your practices remain prosperous and that you and your families remain healthy and well.

Alan I. Nahmias
Plotkin, Rapoport & Nahmias
16633 Ventura Boulevard, Suite 800,
Encino, CA 91436-1836
Phone: 818-995-2555
Fax: 818-907-9261

Email: anahmias@prnlaw.com
Web site: www.prnlaw.com

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Case Analysis

Ninth Circuit B.A.P. Sets Standards for Attorney Fee Awards

Summary: In Movitz v. Baker, 324 B.R. 778 (9th Cir. B.A.P. 2005), the Bankruptcy Appellate Panel for the Ninth Circuit held that attorney's fees cannot be awarded until (i) complete and accurate disclosure is made of potential conflicts, including the receipt of potentially avoidable pre-petition transfers; and (ii) the court determines whether counsel was the recipient of avoidable preferential payments.

Factual Background: Pre-petition, Debtor attempted to negotiate consensual resolutions with its creditors. Debtor's counsel, Barton Baker ("Baker"), refused to continue to provide legal services unless he was brought current on his unpaid invoices. Baker received two payments totaling approximately $2,600 (the "Pre-petition Payments"), leaving a balance of approximately the same amount (the "Unpaid Balance"). When Debtor's negotiations with its creditors failed, Baker orchestrated a sale of the Debtor's business to a new corporation formed by two of Debtor's principals and its comptroller. After the sale, Debtor filed a voluntary Chapter 11 petition. Baker applied for employment by the estate, signing the application himself. The application failed to disclose Baker's involvement in the sale, the Pre-petition Payments and the Unpaid Balance, and failed to disclose that one of the Pre-petition payments in the amount of $1,000 was paid within the preference period. Nor did Baker file the required Rule 2014(a) statement. The bankruptcy court granted his application.

Subsequently, the Debtor filed a Plan and Disclosure Statement. The Disclosure Statement failed to discuss the Pre-petition payments, and failed to accurately disclose the sale transaction. Upon the motion of the United States Trustee, who questioned the "insider" sale as a fraudulent transfer, the court appointed a Chapter 11 Trustee, who then converted the case. Thereafter, Baker filed his application for compensation. The fee application did not address (i) Baker's conflicts in having orchestrated the pre-petition sale, (ii) the Pre-petition Payments; or (iii) the Unpaid Balance. The Trustee objected, arguing that the Pre-petition Payments appeared to be preferential transfers and that Baker's disclosure failures required disallowance of the requested fees. The bankruptcy court allowed the fee application in full, finding nothing "sinister or illegal" in the sale transaction, and finding that it could not determine preference issues in the context of a fee application, but must, instead, address them only upon the filing of an adversary action. The Trustee appealed.

Discussion: The 9th Circuit BAP found that full disclosure is a prerequisite for both employment and compensation. The BAP reaffirmed 9 th Circuit precedent in finding that even inadvertence or negligence "do not vitiate the failure to disclose" and that full disclosure is required "no matter how irrelevant or trivial those connections may seem". Absent adequate disclosure, the court cannot determine if Baker has an interest adverse to the estate and whether his employment was valid. Since employment is a prerequisite to compensation, the failure to disclose required denial of compensation. Although Baker had alleged that he had an "ordinary course of business" defense to the alleged preference, the BAP found that regardless of whether Baker would ultimately have prevailed on any preference defense, the failure to disclose the payments, as well as his other potential conflicts related to the sale, may have been sufficient to render him ineligible for employment by the Debtor, and should have been taken into account by the bankruptcy court.

The BAP went on to find that the bankruptcy court should have determined whether Baker had received an avoidable preferential transfer, without requiring the Trustee to file an adversary proceeding. The BAP placed the burden of seeking a determination of preference liability squarely with Baker, ruling that "[t]he initial burden is on Baker to establish that he was eligible for employment and should receive compensation notwithstanding his possible conflicts of interest and his nondisclosures, including that he received what appears on its face to have been a preference. If Baker meets that initial burden then the bankruptcy court will still have to give Trustee [sic] the opportunity to resolve the preference issues before Baker may be paid any compensation."

The BAP found that if Baker received an avoidable preference he would be ineligible to receive any compensation until he returned the preference to the estate, stating and that he may even be ineligible for employment in the first instance until he returned the preference. The BAP noted that even if the amount of the preference is insubstantial - in this case it was merely $1,000 - a professional can be rendered ineligible for employment by the estate, stating that "even if the estate in this case ultimately gains no financial benefit, it is critical that we enforce the ethical requirements of the Bankruptcy Code and Rules." The BAP determined that the bankruptcy court should either stay the hearing on compensation pending resolution of the alleged preference or combine the matters into one proceeding. In this respect, the court followed the ruling of the Third Circuit in In re Pillowtex, 304 F.3d 246 (3rd Cir. 2002). In that case Jones Day had been employed without a determination of its preference exposure. The Third Circuit reversed and remanded finding that a determination of the preference issues was crucial in order for the bankruptcy court to determine whether Jones Day had a disqualifying conflict of interest.

Comment: Clearly "a word to the wise is sufficient"! Lest we forget the severity of the Pillowtex decision, the burden appears to be on the professional seeking retention to have all issues which may potentially affect the determination of disinterestedness be addressed prior to entry of the order of employment. Waiting until the application for compensation is filed may, at worst, lead to reversal of the order of employment and at best, to disallowance or disgorgement of fees. Even if the payments received prior to the bankruptcy filing are minimal, or subject to valid defenses, they must be disclosed and addressed at the time retention is sought. The penalty for failure to do so is too high to ignore.

Faye B. Feinstein
Quarles & Brady, LLP
500 West Madison Street
Chicago , Illinois 60661

fbf@quarles.com

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Case Law Update

Trustee May Prosecute Assigned Claims. The United States Court of Appeals for the Fourth Circuit held that a bankruptcy trustee has standing to prosecute claims unconditionally assigned to him by creditors where any recovery would inure to the estate's benefit and be shared by the assigning creditors pro rata with other creditors. The court further held that the in pari delicto defense did not preclude the trustee's suit on the assigned claims. Logan v. JKV Real Estate Services (In re Bogdan), 2005 U.S. App. LEXIS 13385 (4th Cir. July 6, 2005).

Congress Acted within its Power to Enact § 110. Appellant was a non-lawyer bankruptcy petition preparer under § 110. Appellant was found to have engaged in unfair and deceptive acts and the unauthorized practice of law, collected a fee for filing the petition in violation of the law, and charged an excessive fee. Appellant claimed, inter alia, that § 110 exceeds the scope of Congress's enumerated power. Court found that due to the importance of the petition and schedule in the bankruptcy process, it was within the meaning of "the subject of Bankruptcy" and within Congress's power to pass uniform laws governing those persons wishing to prepare such documents. Furthermore, even though "not squarely within the meaning of 'the subject of bankruptcies,' passing uniform laws for the protection of debtors during the process of preparing the bankruptcy petition is eminently 'necessary and proper' to effectuate Congress's power under the Bankruptcy Clause." Doser v. US Trustee (In re Doser), 2005 U.S. App. LEXIS 11558 (9th Cir. June 17, 2005).

Section 502(g) Requires that Damages be Fixed as of a Date Before the Filing of the Petition. When an executory contract is rejected, damages are fixed at or immediately before the date of the filing of the petition, not at some later time when an executory contract is, in fact, rejected. Section 502(g) requires that damages be fixed as of a date before the date of the filing of the petition. Damages should be fixed as of the time of the deemed breach, which is "immediately before the date of the filing of the petition." Bank of Montreal v. American Homepatient, Inc., 2005 U.S. App. LEXIS 13900 (6th cir. July 11, 2005).

Recovery of Attorney's Fees and Costs Incurred in Dischargeability Proceedings Allowed. The Eleventh Circuit held that a prevailing debtor in a dischargeability action brought by his creditor can recover his attorney's fees and costs incurred in those dischargeability proceedings if recovery of such are due under an enforceable contractual right, such as a statutory reciprocal attorney's fee provision, provided for by state law. It found that "to deny a debtor attorney's fees and costs for prevailing in a dischargeability proceeding brought by a creditor, where those same fees would have been available under state contract law for the creditor had it prevailed, would contravene the primary purpose of the bankruptcy statute, which is 'to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh.'" Cadle Co. v. Martinez (In re Martinez), 2005 U.S. App. LEXIS 14090 (11th Cir. July 13, 2005).

Only a "True Lease" Counts as a "Lease" under § 365. The bankruptcy court held that the word "lease" in § 365 includes "true leases" but not transactions where the form of a lease is used but the substance is that of a security interest. However, the Seventh Circuit reversed the lower court and found that substance controls as to determining what is a lease and that only a "true lease" counts as a "lease" under § 365. Furthermore, the Court cautioned that state law must be used whenever possible to define the interests upon which the Code operates. Thus, state law should be used to determine what is a "true lease." United Airlines, Inc. v. HSBC Bank, USA, 2005 U.S. App. LEXIS 15240 (7th Cir. July 26, 2005).

Bankruptcy Court Interprets, and Limits, BAPCPA Homestead Exemption Cap. Debtor moved for abandonment of his residence from the Chapter 7 estate and creditors made several arguments opposing the abandonment under the BAPCPA, allowing the Court the first opportunity to interpret the new law. The Court held that the § 522(b)(3) amendment (regarding the applicable state law exemption) does not apply until October 17 since the amendment is not among the limited exceptions as to the October 17 effective date. The Court also found that the homestead deduction for fraudulent transfers (§ 522(o), as added by § 308) applies now, as § 308 is among the limited exceptions to the general effective date. Finally, the Court held that the $125,000 homestead cap applies only in non-opt out states. However, the Court suggested that a technical amendment be made to BAPCPA concerning § 522(p). The problem arises because the $125,000 cap under § 522(p) arises only "as a result of electing under subsection (b)(3)(A) to exempt property under State or local law." Under § 522(b)(1) debtors are able to elect to exempt property either 1) under federal bankruptcy exemptions (§ 522(d)) or 2) state and federal non-bankruptcy exemptions. However, this election may be taken away by the combination of state law and § 522(b)(2). Since § 522(b)(2) provides that the bankruptcy exemptions of § 522(d) may not be elected by a debtor if the applicable state law does not so authorize, states are able to opt-out of the Code's exemptions, and thus, a debtor would not be able to elect state exemptions. Since they are the only exemptions available to the debtor, no election is made. Consequently, due to the plain language of the Code as written, the Court reluctantly concluded that the cap applies only "as a result of electing." "Where there is no election, the cap cannot be the result. Since Arizona is an opt-out state that does not permit debtors to make any elections of which exemptions to claim, the $125,000 cap of Code § 522(p) is not implicated." In re McNabb, 2005 Bankr. LEXIS 1231 (Bankr. D. Ariz. June 23, 2005).

Paige E. Barr
Jaffe Raitt Heuer & Weiss
27777 Franklin Road, Suite 2500
Southfield , Michigan 48034-8214

Phone: 248.727.1398
Fax: 248.351.3082
pbarr@jaffelaw.com

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Washington Hot News

House Bankruptcy Hearings Focus on Consumer Issues
 July 26, 2005

Yesterday, the House Judiciary Committee's Commercial and Administrative Law Subcommittee held a hearing on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, focusing primarily on the consumer provisions and issues that may arise during implementation of the law in October.

Clifford White III, acting director of the Executive Office for United States Trustees, stated the law "provides the [Trustee] Program with new tools to enhance the integrity and efficiency of the bankruptcy system for the benefit of all parties and in the public interest."

White noted that the Act requires the U.S. Trustee Program to review Chapter 7 petitions to ensure that debtors satisfy a means test and must file motions against those who have the ability to repay all or part of their debt.

In addition, the Act requires individual debtors obtain credit counseling before filing bankruptcy and they must complete a financial management course as a condition of receiving a discharge. White pointed out that The U.S. Trustee must approve eligible credit counseling agencies and debtor education courses and will develop procedures to ensure debtor compliance.

Judge A. Thomas Small, with the U.S. Bankruptcy Court for the Eastern District of North Carolina, testified on behalf of the Judicial Conference of the United States that, "implementing the legislation on a timely basis presents a tremendous challenge for the judiciary."

Consumer Federation of America Legislative Director Travis Plunkett testified on behalf of CFA, the National Consumer Law Center, and the U.S. Public Interest Research Group. He explained these organizations opposed the law and intend to "closely monitoring the implementation of this law over the next few years."

Plunkett's concern included the new credit counseling requirements; he pointed out the existence of unscrupulous agencies in this industry. With regard to fees charged for these services, Plunkett recommended the EOUST "require agencies to administer a sliding scale of fees based upon a fair and rigorous assessment of ability to pay, and that it cap the amount that can be charged for a counseling session."

Plunkett also expressed privacy concerns with the requirement that debtors provide tax returns or transcripts of returns to the trustee, and in some cases, file them with the court.

George Wallace testified on behalf of the Coalition for the Implementation of Bankruptcy Reform and focused on the bonding requirements for credit counseling applications, which "may be excessive given the limited resources of many non-profit counseling agencies."

Former FTC Official Urges Congress to Avoid Hasty Data Security Legislation

According to former Federal Trade Commissioner Orson Swindle, Congress should not rush to pass legislation to address data security breaches. Swindle went further in his July 22nd statement and urged lawmakers to work with industry before taking a regulatory approach to the problem. While discouraging new regulations, Swindle said regulations are likely to come if companies fail to take action on their own.

Louisiana Bill Requiring Security Breach Notification Becomes Law

On July 12th, Louisiana Gov. Blanco (D) signed S.B. 205, effective January 1, 2006, requiring businesses and government agencies to notify state residents and government authorities if they discover an unauthorized security breach of computerized sensitive personal data. The law allows avoidance of notification if, after a reasonable investigation, there is "no reasonable likelihood" of harm to consumers.

The bill defines "security breach" as the "compromise of the security, confidentiality, or integrity of computerized data that results in, or there is a reasonable basis to conclude has resulted in, the unauthorized acquisition of and access to personal information maintained by an agency or person."

Under S.B. 205, notification of security breaches of personal data must be made in the most expedient time possible and without unreasonable delay. Notification of a security breach may be carried out by written notice or electronic notification. Substitute notice by posting announcements on the entity's Web site and notifying major statewide media is allowed if the cost of notifying individuals affected exceeds $250,000, if the number of individuals to be notified exceeds 500,000, or the agency or business does not have sufficient contact information.

The bill contains a safe harbor provision under which a business or agency that maintains its own data security and notification policy consistent with the provisions of the bill is deemed to have met the notification requirement.

Financial institutions subject to and in compliance with federal regulatory agency guidance on customer information security and notice are also deemed to be in compliance with the bill's provisions.

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National Convention Election Report

At the Annual Session of the Bankruptcy Section on Friday, July 15 in Toronto, the members of the Bankruptcy Section voted to accept the Nominating Slate as submitted by the Nominating Committee, pursuant to the rules of the Bankruptcy Section Bylaws. As no petitions for additions to the slate were received, the elections took place by voice vote and the slate was unanimously approved.

The new Commercial Law League of America's Bankruptcy Section officers and Executive Council members are as follows:

Officers (1 year term: 2005-2006)

  • Chair - Cathy Pike, Weber and Rose, PSC, Louisville, KY
  • Chair-Elect- Ivan Reich, Becker and Poliakoff, Fort Lauderdale, FL
  • Secretary - Karen J. Porter, Law Offices of Karen J. Porter, Chicago, IL  

Executive Council (three year terms: 2005 - 2008)

  • Alan R. Gordon, Pelino & Lentz, Philadelphia, PA
  • Paige Barr, Jaffe Raitt Heuer & Weiss, Detroit, MI
  • The Honorable Judith Fitzgerald, Chief Judge, US Bankruptcy Court, Western Pennsylvania, Pittsburgh, PA
  • William A. Brandt, Development Specialists, Inc., Chicago, IL

Executive Council (two year term, 2005-2007) to complete unexpired term of Ivan Reich:

  • Alan E. Ramos, Law Offices of Alan Ramos, Pleasanton, CA

Executive Council (one year term, 2005-2006) to complete unexpired term of Nigel Hamer:

  • Gary S. Weiner, Weiner Law Offices, Springfield, MA

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