CLLA Bankruptcy Section Newsletter

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http://www.cllabankruptcy.org/bankruptcy/may2005.cfm

Like it or not, you have a new bankruptcy law. It affects virtually every party of interest in any type of bankruptcy case. In order to provide your clients and prospects accurate advice you must become familiar with these fundamental changes. Although much of this legislation will not become effective until October, there are many provisions that became immediately effective when President Bush signed the bill into law on April 20.

The CLLA has two upcoming live telephone seminars, as well as CD archives of past programs.

June 22: "Business Bankruptcy Practice Under the New Code." This program will be broadcast nationwide and will provide an in depth discussion of what bankruptcy practice will be like after October 17, 2005. Speakers are Hon. Bruce Markell, Peter Califano, Judith Greenstone Miller and Jay Welford. All of these speakers have testified during the long legislative process leading up to this new law. The two hour seminar cover all major (and many minor) changes to the Code affecting the business bankruptcy practitioner.

June 23: "Consumer Bankruptcy Practice Under the New Code" featuring nationally reknowned expert The Honorable Eugene Wedoff. Joining him will be Catherine Vance who is a leading expert on the issues raised by the new Code regarding attorney liability.

As a reminder, for one fully paid registration fee your whole office can listen.

Audio CD Available for Bankruptcy Reform Overview: Understanding the Radical Bankruptcy Code Changes - featuring The Honorable Eugene Wedoff, Judith Greenstone Miller, Catherine Vance and Jay Welford.

www.clla.org

Sua Sponte

Without becoming too philosophical, it is often said, "from bad comes good." And so it is with the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("New Law"). Our Section, recognized nationally for, among other things, our superior educational programs, has taken the latest batch of lemons handed to our industry in the form of the New Law, and, through the live panel presented in Chicago and, within a few short weeks of the New Law's enactment, the two telephone seminars which have been put on to date and two more to come (details below), it has made lemonade.

Case Analysis

Summary : Under Fowler v. Shadel, 400 F.3d 1016 (7 th Cir. 2005), a sole shareholder of a corporation who filed a chapter 7 case and claimed an exemption in corporate assets based upon an equitable interest in the assets under state law loses to the chapter 7 trustee.

Case Law Update

Sua Sponte

The response to the programs that have been put on to date has been nothing short of overwhelming, with attendees expressing complete delight and satisfaction, not only with our presenters, who have included The Honorable Eugene Wedoff, The Honorable Bruce Markell, Judith Greenstone Miller, Jay Welford, Catherine Vance and Peter Califano, but also with the outstanding quality of the written materials. Having attended various other programs on the topic, I can say, without bias, our programs on the New Law are the best that I have experienced anywhere, and the comments I have heard from others in attendance strongly echo that sentiment.

The next call-in programs will be held on June 22 and 23, 2005 from 1:30 to 3:30 p.m. EDT, and all of you who have either not yet attended one of the Section's programs on the New Law, or simply want to hear it again, are urged to subscribe, which you can do by signing up for the program by connecting to the following link: www.clla.org.

On June 22 we will hold a reprise of the "Business Bankruptcy Under the New Code" program due to overwhelming demand. Reviews on this program when it was first held were so strong that attendees recommended holding an encore!

On June 23 the "Consumer Bankruptcy Under the New Code" program will focus on the intricacies of how the new legislation affects consumer practice. This program features The Honorable Eugene Wedoff, nationally recognized expert on consumer bankruptcies. Joining him is Catherine Vance, the leading expert on the murky implications of the new attorney liability components to the New Law.

As a reminder, our programs have another unique component which has been highly commended - for one registration fee, multiple people can listen to the program. At our first two programs we have had sites with over ten people participating.

Additionally, the written materials on the New Law, which are both comprehensive and user-friendly, can be downloaded by clicking here. The response to these materials has been overwhelming. In that regard, the Section is also making the materials available to its members, for presentation purposes, should any of the Section members wish to put on local or regional programs in their areas. If you are planning on using the materials, the CLLA and our Section should be given sponsorship recognition for the materials at the program. If you have an interest in obtaining the use of these materials, please contact Sarah Jolie at (312) 275-1500 or sjolie@clla.org.

Additional efforts are also underway, overseen by the Chairman of our Legislative Committee, Peter Califano, to prepare a comprehensive paper in support of a Technical Corrections Bill, which is rumored to already be in the works. While many have signed up to assist Peter in this daunting task, there is still room for more volunteers. If you would like to offer your assistance to Peter, he can be reached at (415) 765-0363, or at his email address of pcc@cwclaw.com.

Finally, if you have not yet registered for the Commercial Law League's 111th National Convention, being held from July 13-17, 2005 in Toronto, Canada at the incomparable Four Seasons Hotel, located in the most glorious part of Toronto, you should do so as soon as you possibly can. Those of you who have been to a CLLA National Convention know how special they are, with an emphasis on family and getting to better know fellow Section and CLLA members, in quieter, calmer and more casual surroundings. Those of you who have yet to attend one truly should consider this opportunity, as some of my family's closest friendships have been formed over the years at these meetings. If you would like to register for the 111 th National Convention, you may do so by clicking here. I hope to see all of you there.

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

Case Analysis

Summary : Under Fowler v. Shadel, 400 F.3d 1016 (7 th Cir. 2005), a sole shareholder of a corporation who filed a chapter 7 case and claimed an exemption in corporate assets based upon an equitable interest in the assets under state law loses to the chapter 7 trustee.

Factual Background : On December 29, 2003, Bobby Fowler filed an individual chapter 7 case in Wisconsin. Fowler was the sole shareholder of the corporation Fowler Trucking, Inc. and its sole employee. Fowler Trucking owned two vehicles, a 1990 Mack truck and a 2000 Chevy Impala. Fowler used the Mack truck to earn a living and he used the Impala as his personal vehicle. Fowler used the Wisconsin exemptions and claimed that his interest in the Mack Truck and the Impala were exempt. Fowler did not claim an exemption for his stock or equity interest in Fowler Trucking. The court assumed that Fowler elected not to use the federal exemptions which included a wildcard that could have been used to exempt his interest in Fowler Trucking because he preferred to use the Wisconsin state exemptions which offered a larger homestead exemption. The chapter 7 trustee filed an objection to Fowler's claim that the vehicles were exempt. The bankruptcy court sustained the trustee's objection. The matter was appealed to the district court which affirmed the bankruptcy court and found that Fowler had no legal interest in the property owned by the corporation.

Discussion: Fowler argued to the Seventh Circuit that since he was the sole shareholder of Fowler Trucking he had an equitable interest in the assets of Fowler Trucking and that equitable interest was enough for him to claim an exemption in the vehicles. Section 541(a) of the Code provides that a debtor's chapter 7 estate includes all legal and equitable interests in property. The Wisconsin exemption statue did not distinguish between legal and equitable interests in property.

The court stated that Fowler's argument seemed to be sound, but upon further examination it suffered from a fatal flaw. Fowler's premise that the sole shareholder of a corporation has an equitable interest in its assets was derived from the fact that if the corporation was liquidated the shareholders would become the legal owners of the assets.

Therefore, a sole shareholder would become the sole legal owner of the corporate assets upon liquidation. The concept that a shareholder holds an equitable interest in the assets of the corporation found support in Wisconsin law. "A conveyance of all the capital stock to a purchaser gives to such purchaser only an equitable interest in the property to carry on business under the act of incorporation and in the corporate name, and the corporation is still the legal owner of the same." Button v Hoffman 61 Wis 20, 20 NW 667, 668 (1884).

The Seventh Circuit found that the existence of an equitable interest would not make a difference for Fowler since he failed to dissolve the corporation before filing the chapter 7 case and his ownership of the stock ended when he filed the chapter 7 case. Any equitable interest Fowler had in the stock passed to the chapter 7 trustee. "To say that at bankruptcy Fowler could retain an equitable interest in corporate vehicles is to say that upon a subsequent liquidation of the corporation, Fowler would have obtained some legal interest in them as against the trustee. This is impossible. As the owner of the shares in bankruptcy, the trustee could liquidate the corporation and obtain legal ownership of the corporate vehicles." Fowler v Shadel, 400 F.3d at 1018.

The Seventh Circuit concluded that the corporate assets of Fowler Trucking were not property of the debtor. Fowler could not claim an exemption in the vehicles, which were actually owned by the chapter 7 trustee. In ruling against Fowler, the court reinforced that "corporate assets cannot become part of the bankruptcy estate of the debtor shareholder." Id. at 1019.

The court expressed sympathy at the consequences Fowler would face as a result of its ruling. However, the court did indicate the result could have been avoided by a dissolution of the corporation before the chapter 7 filing or the use of the federal exemptions to exempt Fowler's interest in the stock of Fowler Trucking.

Comment : In this decision, the Seventh Circuit appears to offer prebankruptcy planning advise. The result would apparently have been different if Fowler had dissolved the corporation before filing the chapter 7 and then claimed exemptions for the vehicles as his personal property. There are many instances where the principal of a closely held corporation facing financial difficulty is advised to file one individual chapter 7 case instead of filing a chapter 7 case for the corporation. This decision strongly suggests that the extra step of a corporate dissolution before filing the bankruptcy case should not be overlooked.

Karen J. Porter
Law Office of Karen J. Porter, Ltd.
11 E. Adams Street, Suite 604,
Chicago, IL 60603-6303
Phone: 312-673-0333
Fax: 312-673-0334

Case Law Update

Preference Claim Denied as Court Finds Debtor a Mere Dispersing Agent of Funds. Court found that payments made to Debtor were not property of the Debtor's estate since the authority of the debtor was limited in respect to the payments. Creditor hired debtor to assist with its processing and payment of freight charges. Pursuant to the parties' agreement, the debtor was to compile all of the Creditor's invoices and send the Creditor one total invoice at the end of each week. Creditor would send payment of the invoice to the Debtor along with the Debtor's service fees. Debtor would then issue and mail payment checks to the carriers. Debtor, experiencing financial trouble, began floating carriers' checks in an effort to gain interest on the funds before dispersing them to carriers. It was the Debtor's practice to pay carriers of complaining clients first. In this case the Creditor complained of the late payments to its carriers in the amount of $4,490,414.04 made to the Creditor's carriers within 90 days of the filing of the involuntary petition. Thus, the Creditor's carriers were owed a mere $300 whereas other clients of the Debtor had carriers owed over $24 million. Trustee's preference claim on the funds distributed to Creditor's carriers was rejected by the Court because the Court found that the Debtor was a mere dispersing agent of the Creditor and therefore, the funds were not part of the Debtor's estate. Pursuant to the parties' agreement, the funds were transferred for the sole purpose of allowing the Debtor to pass them on to the Creditor's carriers. Lyon v. Contech Construction Prod. (In re Computrex), 2005 U.S. App. LEXIS 6276 (6th Cir. Apr. 15, 2005).

Insurance Company Can Obtain Priority Status for Claims of Unpaid Premiums and Fees Pertaining to Employee Benefit Plan Owed by Debtor- Employer. Court found that unpaid health insurance premiums and fees fall within the meaning of "employee benefit plan" under § 507(a)(4) and an employer's payment of insurance premiums constitutes a "contribution." Court also rejected the trustee's contention that § 507(a)(4) was inapplicable since the insured individuals were not employed by the debtor in the 180-day period before the bankruptcy filing. The Court held that the language of § 507(a)(4) "contemplates that such a claim (referring to claims arising from services rendered within 180 days before the date of filing the petition) can - and perhaps must - arise from services rendered by the claimant, namely the creditor seeking priority status." Thus, since the insurance company was providing health care services to the employees in the 180-days preceding the bankruptcy filing, the insurance company was able to obtain priority status. Ivey v. Great-West Life & Annuity Ins. (In re J.G. Furniture Group), 2005 U.S. App. LEXIS 6723 (4th Cir. Apr. 20, 2005).

Third Circuit Uses Five Part Test for Requirements for a Proof of Claim Filing. Agreeing with many other Courts of Appeals, the Third Circuit used the five-part test for a document to qualify as an informal proof of claim. Under the test, a document will qualify as an informal proof of claim only if it 1) is in writing, 2) contains a demand by the creditor on the bankruptcy estate, 3) expresses an intent to hold the debtor liable for the debt, and 4) the document is filed with the bankruptcy court. If the document meets the first four requirements, the court must determine whether it would be equitable to treat the document as a proof of claim given the facts of the case. Hefta v. Official Committee of Unsecured Creditors (In re American Classic Voyages), 2005 U.S. App. LEXIS 7185 (3d Cir. Apr. 27, 2005).

It is Within the Bankruptcy Court's Discretion to Reopen Proceedings. The Court rejected Debtor's argument that because bankruptcy cases are reopened as a matter of routine, the bankruptcy court erred by refusing to reopen on a ground not previously recognized by case law or statute. Court held that it is within the bankruptcy court's discretion to base its decision to reopen proceedings on the particular circumstances and equities of each particular case. Furthermore, the Court ruled that "a debtor's desire to adjudicate an issue in bankruptcy court, rather than in an alternative forum, constitutes insufficient grounds on which to reopen a bankruptcy case." The Court reasoned 1) the state court is fully competent to determine the issues presented and 2) "Congress explicitly declined to create a right to adjudication of Chapter 11 issues in bankruptcy court in all instances," by granting concurrent jurisdiction to state courts. Apex Oil Co. v. Sparks (In re Apex Oil Co.), 2005 U.S. App. LEXIS 7437 (8th Cir. Apr. 29, 2005).

Section 365(d)(10) Entitles Lessor to an Administrative Expense for All Lease Payments. Fourth Circuit found that a lessor is entitled to recover all payments due under the lease (including rent, taxes, interest, late fees, and attorney's fees) as an administrative expense if 1) the trustee fails to perform its obligations under § 365(d)(10), and 2) the court has not previously modified the trustee's obligations pursuant to § 365(d)(10). However, a lessor must still assert its administrative expense claim under § 503(b). CIT Communications Finance Corp. v. Midway Airlines Corp. (In re Midway Airlines Corp.), 2005 U.S App. LEXIS 7536 (4th Cir. May 2, 2005).

Paige E. Barr
Kenneth B. Moll & Associates
Three First National Plaza, 50th Floor
Chicago, Illinois 60602

Washington Hot News

In early May, Reps. Miller (D-CA), ranking member of the House Education and the Workforce Committee, and Schakowsky (D-IL) introduced H.R. 2327 to forestall future pension plan transfers to the Pension Benefit Guaranty Corporation from bankrupt companies. The bill imposes a six-month moratorium on corporate terminations of pension plans in cases in which reorganization of contributing sponsors is sought in bankruptcy or insolvency proceedings. Prompted by the recent actions of United Air Lines, Miller warned that UAL's actions could be repeated, saying: "All the major carriers will look to the United agreement to see if they can cut their own costs by dumping their workers' pensions." Miller and Schakowsky also are cosponsors of the Pension Fairness and Full Disclosure Act, introduced May 10, which ties executive compensation to the fate of their corporations' pension plans.

On May 3rd, Rep. Rohrbacher (R-CA) introduced H.R. 2060 to amend the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to exempt from the means test in bankruptcy cases, for a limited period, qualifying reserve-component members who, after Sept. 11, 2001, are called to active duty or to perform a homeland defense activity for not less than 60 days. The bill was referred to the Judiciary Committee.

n May 6th, Rep. Ruppersberger (D-MD) introduced H.R. 2201, to amend chapter 7 of title 11 of the U.S. Code, to exclude medically distressed debtors from the application of the means test, to amend the Truth in Lending Act to require certain disclosures in connection with credit card applications and solicitations, and for other purposes. The bill was jointly referred to Judiciary and Financial Services Committees.

In Memorium

On May 24, 2005 the bankruptcy profession lost one of its most respected members. Professor Kate Heidt died unexpectedly at age 51. She was a former senior associate at the law firm of Duane Morris in Philadelphia, former tenured Professor of Law at Wayne State University and current Professor of Law at the University of Pittsburgh School of Law. She was the chair of the Business Bankruptcy Committee of the American Bar Association since 2002. She wrote several "friend of the court" (amicus curiae) briefs for the U.S. Supreme Court and consulted nationally on many cases in her specialty, environmental issues in bankruptcy. She received her B.A., magna cum laude, from Pennsylvania State University, a J.D., magna cum laude, from Cleveland State University School of Law and an LLM from Yale School of Law.

She was the beloved mother of Valerie Heidt; dearest daughter of Teresa (deceased) and Joseph Heidt; dear sister of Joseph Heidt, Jr. and Charlotte; wonderful aunt and friend to Adrienne Heidt-Nixdorf, Matthew Nixdorf and Joseph Heidt, III; loving former spouse of Martin Kriegel and best friend to Nancy Vecchiarelli.

In lieu of flowers, contributions may be sent to the Professor Kathryn R. Heidt Memorial Scholarship Fund at the University of Pittsburgh School of Law, 3900 Forbes Ave., Pittsburgh, PA 15260 or the American Cancer Society. Send condolences to Pittsburgh Post Gazette .

Filing Fee Increase and Effective Date Amendment to Section 325 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Section 325 of the new bankruptcy law has been amended by H.R. 1268, the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005 (Pub. L. No. 109-13), which the President signed into law on May 11, 2005.

The Appropriations Act resolves an effective date disparity in Section 325 that came to light around the time S. 256 was signed into law, in that the Section's allocation of filing fees among the general treasury, the UST program and the judiciary was effective immediately, while the additional funds to be allocated under the Section would not be collected until the general October 17 effective date.

The filing fee for chapter 7 cases is also increased under the Appropriations Act amendment to $220 from the $200 fee provided for in S. 256. The fee increases for chapter 11 and chapter 13 cases provided for in S. 256 are unchanged by the Appropriations Act.

Oddly enough, the Appropriations Act amendment raises questions of its own regarding the effective date of the amendment, stating: "This section and the amendments made by this section shall take effect immediately after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." Although the plain language of this provision means that the fee increase is retroactively effective as of the April 20, 2005, date of enactment of S. 256, a May 13, 2005, memorandum of the Administrative Office of the United States Courts states that the amendment is not effective retroactively, or even immediately, but that the amendment is governed by the general October 17 effective date of S. 256. Please note that the updated"Effective Date and Exceptions to the General Effective Date" - is available for download here