| March 2006 issue: Washington Hot News House Passes Regulatory Relief including FDCPA Amendments (March 20) Your Name Here! The Bankruptcy Section Newsletter Committee is looking for volunteers to write a Case Analysis for an upcoming addition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions -- especially those interpreting BAPCPA's amendments to the Code. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive here. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
Sua SponteCathy Pike, Chair More Changes—Never a Dull Moment after BAPCPA. While many of us are still adjusting to the radical changes which resulted from enactment of BAPCPA, be aware that there are more changes just around the corner. The Attorney General has been charged with the responsibility of verifying the accuracy, veracity and completeness of schedules and other information provided by debtors. Consequently, commencing on October 20, 2006, random and targeted audits of debtors will begin. Case AnalysisTimothy D. Moratzka MECHANIC’S LIEN CLAIMANT NEEDS RELIEF FROM STAY EVEN IF DEBTOR DOES NOT OWN THE REAL ESTATE In re: Rogers & Son Construction, Inc., Case #05-00901-wb (Bankr. SC, February 15, 2006) A bankruptcy court recently granted relief from stay to mechanic’s lien claimant, holding that enforcement of the lien was subject to 11 U.S.C. §362(a) even if subject property was not property of the estate because: 1) the general contractor debtor was a necessary party; and 2) all lien claimants had to be given equal priority. Case Law UpdatePaula Lucas Rejection of lease within bankruptcy court discretion. Landlord refused return of security deposit, which trustee asserted was property of bankruptcy estate. Lower court found the lease rejection to be a breach of contract and refused to recognize the claim. DePaul Symposium SponsorshipErica Henry We are proud to add Jaffe, Raitt, Heuer & Weiss, to our list of sponsors for the 4th Annual DePaul Symposium. The event, cosponsored by DePaul University Law School and the CLLA, takes place on Thursday, April 27, the day before CLLA’s Chicago Meeting officially begins. This year’s Symposium explores the issues of deepening insolvency and ethics challenges raised by the new bankruptcy law, as well as a look at the first six months of BAPCPA. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteMore Changes—Never a Dull Moment after BAPCPA. While many of us are still adjusting to the radical changes which resulted from enactment of BAPCPA, be aware that there are more changes just around the corner. The Attorney General has been charged with the responsibility of verifying the accuracy, veracity and completeness of schedules and other information provided by debtors. Consequently, commencing on October 20, 2006, random and targeted audits of debtors will begin. Debtors to be audited will be randomly selected by the Debtor Audit Unit to be established at the Executive Office of the United States Trustee (“EOUST”). A minimum of 1 out of 250 cases will be audited on a random basis. After selection, an audit notification letter is required to be sent within seven days of the bankruptcy filing. Thereafter, the debtor will be afforded twenty-one days to respond to the auditor with the requested documents being provided. The audit must be completed within twenty-one days of the auditor’s receipt of the requested documents, although reasonable extensions can be granted. Targeted audits will also be selected by the Debtor Audit Unit, using criteria determined by the EOUST. Targeted audits will be processed within same time frame. Criteria for target audit selection are likely to change from year to year, and will not be available for public disclosure. Debtor audits will be performed by independent CPA’s or licensed PA’s who contract with the United States Trustee (“UST”). They will use Generally Accepted Auditing Standards, and will conduct a “desk audit” using documents supplied by the debtor and automated search engines. The audits will consist of the auditor verifying assets, income and expenses in Chapter 7, 11 and 13 cases. In connection with the audits, debtors are required to cooperate with the auditor; to satisfactorily explain material misstatements found in the audit; and to make available for inspection all documents or property requested by the auditor. Documents requested from the debtor will likely include pay stubs for two pay periods, two years of federal tax returns and attachments, three months of bank statements with documents for all transactions for the period and a copy of any divorce decree involving the debtor. The auditor will be required to disclose “material misstatements” and will file its audit report with the Bankruptcy Court and with the Office of the UST. Thereafter, the clerk of the Court will send notice to creditors of material misstatements in audit reports. The audit will be performed using “agreed-upon” procedures and a definition of material misstatements, as well as other items of interest prescribed by UST At least for the initial year of debtor audits, “material misstatements” will include under-reporting of income over certain dollar thresholds, non-reporting of real estate, non-reporting of bank accounts with balances at filing over certain dollar thresholds and understatement or non-reporting of gifts or other transfers over certain dollar thresholds. The auditor will report “other items of interest” to the UST, separate from the report of material misstatements made to the Court. For the initial year of debtor audits, the “other items of interest” may include: issues similar to those raised in material misstatements, but for amounts under the prescribed dollar thresholds; non-reporting of interests in nonpublic businesses; undisclosed tax refunds; and undisclosed vehicles, water craft, or similar personal property with values greater than prescribed dollar thresholds. Other non-reported assets may be included as well. Consequences for a debtor making material misstatements are revocation of discharge and referral to the Office of the United States Attorney. In addition, effective April 9, 2006, bankruptcy-related fees, including filing fees and conversion fees, will be increased. In that the House and Senate bills reflect different increase amounts, no one is certain what the new fees will be. Stay tuned. Cathy Pike, Chair Case AnalysisMECHANIC’S LIEN CLAIMANT NEEDS RELIEF FROM STAY EVEN IF DEBTOR DOES NOT OWN THE REAL ESTATE In re: Rogers & Son Construction, Inc., Case #05-00901-wb (Bankr. SC, February 15, 2006) A bankruptcy court recently granted relief from stay to mechanic’s lien claimant, holding that enforcement of the lien was subject to 11 U.S.C. § 362(a) even if subject property was not property of the estate because: 1) the general contractor debtor was a necessary party; and 2) all lien claimants had to be given equal priority. The Chapter 7 Debtor was a general contractor. The Debtor had no ownership rights in the real estate subject to the liens. The sub-contractor sought to enforce its lien against the real estate in state court and asked for § 362 relief to do so and to join Debtor as a necessary party. Other sub-contractors had sought enforcement in state court without relief from stay and had not named Debtor as a party. The Trustee objected to relief from the automatic stay, arguing that § 362 did not apply and that failure of the sub-contractor to meet statutory deadlines in the mechanic’s lien statutes of South Carolina had resulted in a lapse of any lien rights. The Court first noted that § 362(b)(3) carved out of the automatic stay the right of a creditor to perfect a lien in certain instances. Other cases have agreed that § 546(b) applies to the perfection of mechanic’s liens and that a trustee’s rights are subject to that perfection, holding that § 362(a) does not apply to the perfection of the mechanic’s lien. See, In re Victoria Grain, 45 B.R. 2 (Bankr. D. Minn. 1984); In re Houts, 23 B.R. 705 (Bankr. W.D. Mo. 1982). The Rogers Court then addressed the enforcement of the perfected lien. Enforcement was held to be subject to § 362 NOT because property of the estate was affected but because the Debtor was a necessary party and priorities of creditors were affected. This is a very broad application of § 362(a) and follows the rationale in In re Richardson Builders, Inc., 123 B.R. 736 (Bankr. W.D. Va. 1990). Looking to numerous South Carolina state court decisions, the Court concluded that a general contractor was a necessary party to a foreclosure action because: 1) there is no independent promise to pay by the property owner; 2) there is an aggregate limit and the owner cannot be compelled to pay twice; and 3) the general contractor may have defenses or set-offs the owner does not have. Quoting In re Richardson, the Rogers Court said that the purpose of the automatic stay is to fix rights and priorities of creditors at the time of bankruptcy in order to ensure equality of distribution. The court evidently extends that purpose to any state court proceedings as well. Certain issues that could have been addressed by the Court were ignored. The first such issue is standing. The Court did not mention whether any of the sub-contractors had filed proofs of claim in the bankruptcy case. Because sub-contractors often have liens against real estate outside of the bankruptcy, they may decide not to file claims. A debtor who is a general contractor cannot bring any action to avoid other mechanic’s liens or determine priority because they do not impact property of the estate. Priority is a state court issue. The standing of the mechanic’s lien creditors before the bankruptcy court is not clear. The Court did not discuss jurisdiction either. Mechanic’s liens do not arise under Title 11. The cause of action does not arise in the bankruptcy as the lien foreclosure is outside of bankruptcy. But the lien foreclosure may be related to the Chapter 7 because the claim the property owner has against the general contractor Debtor may be impacted. Regardless, there may not be any jurisdiction since the real estate is not an asset of the estate. Finally, the parties did not raise and the court did not discuss abstention under 28 U.S.C. § 1334(c)(2). Abstention is mandatory where a proceeding has been commenced in state court, relating to a case under Title 11 but not arising under Title 11 and in which there is no independent basis for federal jurisdiction. The Court admitted that other lien claimants had begun state court foreclosure. Again, the real estate involved was not an asset of the bankruptcy estate. If abstention was not mandatory, it perhaps should have been voluntary. Many factors can be considered by the court. Williams v. IMC Mortgage, 256 B.R. 885 at 894 (8th Cir. B.A.P. 2001), provides a list of twelve factors, including some applicable here: mechanic’s liens are solely a state law issue; the administration of the estate is unlikely to be affected; there is no core jurisdiction; there is a right to a jury trial; and, finally, the actual owner of the real estate is not involved. Perhaps voluntary abstention would have been appropriate. Some states allow a sub-contractor to provide a notice to the property owner in order to establish the liability of that owner for the sub-contractor’s work. Certainly the bankruptcy court cannot overturn established priorities in the state court foreclosure when the real estate is not an asset of the estate. These issues were not discussed by the Court, which granted relief from the stay and did not abstain from any other relief. The court took one step further; it tolled the statute of limitations for lien foreclosure. That substantively affected parties in state court over which the bankruptcy court’s jurisdiction is subject to question. Timothy D. Moratzka Case Law UpdateRejection of lease within bankruptcy court discretion. Landlord refused return of security deposit, which trustee asserted was property of bankruptcy estate. Lower court found the lease rejection to be a breach of contract and refused to recognize the claim. On appeal, court found that the breach both relieved the debtor of future obligations and constituted a breach of contract; however, it did not in and of itself bar the trustee’s right to recover the balance of the security deposit in a breach of contract action. Thus, lower court had abused its discretion by not overseeing the case. In re Onecast Media, 2006 U.S. App. LEXIS 4304 (9th Cir. Feb.23, 2006). Dismissal of suit for failure to prosecute improper. State trial court erred in dismissing personal injury action for failure to prosecute. Suit was stayed because of defendant’s bankruptcy and trial court previously entered order to that effect. There was no evidence that stay was not in effect at time of dismissal notwithstanding defendant’s assertion that stay had been lifted. Pertofsky v. Arbor Living Centers of Florida, Inc. 2006 Fla. App. LEXIS 3306 (Fla. App. 4 Dist. Mar. 8, 2006). Debtor’s failure to appear does not preclude granting creditor requested relief. Debtor’s failure to appear at hearing on a motion to terminate an automatic stay did not bar the court from hearing the motion. Despite debtor’s argument that no adequate notice of the hearing was provided the court found notice and thus the hearing proper. Harris v. Boyd G. Montgomery Testamentary Trust (In re Harris), 2006 Bankr. LEXIS 176 (8th Cir. B.A.P. Feb. 15, 2006). Court lacks jurisdiction over party settlement agreement. Bankruptcy court improperly construed agreement made between two creditors in a prior adversary proceeding. The settlement agreement released creditor claim against debtor. The court found the bankruptcy court lacked jurisdiction to interpret the agreement, and reversed the settlement. Sea Hawk Seafoods, Inc. v. Alaska (In re Valdez Fisheries Development Ass’n.), 2006 U.S. App. LEXIS 4158 (9th Cir. Feb. 22, 2006). Attorney Censured for Unreasonable Fees. Public censure is appropriate for Kansas attorney who violated his duty to not charge clients an unreasonable fee where the attorney's practice was to charge clients for one hour of work, accomplished by rounding up, when one hour of work was not done on the client's behalf. "'[B]illing for quarter hours is not a violation if that time is spent on a client's business. The violation is in not spending the time billed to the client on the client's business.'" In re Myers, 127 P.3d 325 (Kan. 2006). Paula Lucas Washington Hot NewsHouse Passes Regulatory Relief including FDCPA Amendments (March 20) Massachusetts Directive on Bankruptcy Trustee Tax Reporting (March 8) Last month, the Massachusetts Department of Revenue issued a directive (Directive No. 06-1) on the new filing requirements, based on BAPCPA, for Chapter 7 bankruptcy trustees who file debtor corporation's tax returns. The directive replaces Directive 02-15. In a Chapter 7 case where the order of relief was entered on or after October 17, 2005, the trustee must file a Form 355, Business or Manufacturing Corporate Excise Return for each year that the bankruptcy case is open, including the entire year in which the order for relief was entered. New Study Says Medical Debt Contributes to Lower Percent of Personal Bankruptcies (March 6) A study entitled “Medical Bankruptcy: Myth Versus Fact” which was released last week on the Health Affairs website, a health policy journal, purports to refute previous findings that medical debt contributes to a majority of personal bankruptcies. The study said medical debt is a contributing factor in 17 percent of personal bankruptcies. The study was in response to the February 2005 study, “Illness and Injury as Contributors to Bankruptcy,” by David Himmelstein of Harvard Medical School, along with Elizabeth Warren, Deborah Thorne and Steffie Woolhandler, that also appeared on the Health Affairs Website, which concluded that medical debt contributes to 54.5 percent of personal bankruptcies. DePaul Symposium SponsorshipWe are proud to add member firm Jaffe, Raitt, Heuer & Weiss to our ever-growing list of sponsors for the 4th Annual DePaul Symposium. The event, cosponsored by DePaul University Law School and the CLLA, takes place on Thursday, April 27, the day before CLLA’s Chicago Meeting officially begins. This year’s Symposium explores the issues of deepening insolvency and ethics challenges raised by the new bankruptcy law, as well as a look at the first six months of BAPCPA. Panel 1
Luncheon:* Panel 2 Speakers:
Panel 3 Speakers: The DePaul Symposium would not be possible without the support of our generous sponsors, who have together agreed to donate over $5,500 so far. Sponsors CLLA Patron Fund CLLA Fund for Public Education Development Specialists, Inc. Behar, Gutt & Glazer, PA Cooper, White & Cooper, LLP Financial Services Network Jaffe, Raitt, Heuer & Weiss Lexis Nexis Pelino & Lentz, PC Plotkin, Rapoport & Nahmias Nancy B. Rapoport Shaw Gussis Fishman Glantz Wolfson & Towbin LLC Stahl, Cowen & Crowley, LLC The Symposium will be an excellent opportunity to earn CLE credits while listening to and learning from some of the leading national and local experts. The symposium will be held at the Westin Michigan Avenue Hotel, 909 North Michigan Avenue, Chicago, Illinois. And at a mere $75, lunch included, it is a MUST! Click here to register now. Also, please contact Erica Henry at the email address below if you are interested in joining the sponsorship. Erica Henry |