Bankruptcy Blog

Projected Does Not Mean Multiplication

2010-06-23T11:38:00.002-04:00

In a recent U.S. Supreme Court decision, the Court held when a bankruptcy court calculates a debtor’s projected disposable income for the purposes of determining the required Chapter 13 plan payment, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.

In Hamilton v. Lanning, No. 08-998, 2010 WL 2243704 (U.S. June 7, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-998.pdf, the Debtor received a one-time buyout from her former employer that caused her current monthly income for the six months preceding her Chapter 13 filing to exceed her State’s median income. However, at the time of the filing, based upon the income from her new job which fell below the state median, she filed a plan that would require her to pay $144 per month for 36 months. The Bankruptcy Court endorsed a $144 payment over a 60-month period concluding that “projected” requires courts to consider a debtor’s actual income at the time of filing. The Tenth Circuit Bankruptcy Appellate Panel subsequently affirmed, as did the Tenth Circuit.

The Chapter 13 Trustee objected to the confirmation of the plan claiming the mechanical approach of the Bankruptcy Code, which calculates projected income from the past six months income, is the proper way to calculate projected disposable income, and using that approach, the Debtor should pay $756 per month for 60 months. The Court found the Trustee’s arguments supporting the mechanical approach unpersuasive. “The claim that the Code’s detailed and precise disposable income definition would have no purpose without the mechanical approach overlooks the important role that this statutory formula plays under the forward-looking approach…” Instead, the Court reasoned the mechanical approach clashes with §1325’s terms in that reference to disposable income in §1325(b)(1)(B) strongly favors the forward looking approach if the mechanical projection does not accurately reflect disposable income “to be received.” Furthermore, the Court found that §1325(b)(1) directs the courts to determine projected disposable income “as of the effective date of the plan.” Additionally, §1325(b)(1)(B)’s requirement that projected disposable income “will be applied to make payments” is made useless if the Debtor lacks the means to pay into the plan what the mechanical formula determines to be the proper amount.

The Supreme Court looked at this issue in a very practical way, and paved the way for flexibility in crafting Chapter 13 plans that have a better chance of succeeding. Nobody benefits from requiring a debtor to commit to a plan payment that is far in excess of that the debtor’s actual cash flow permits.

Electricity is Good

2010-06-23T11:31:00.004-04:00

In a recent case of first impression in the First Circuit, Judge Boroff held that a creditor’s supply of electricity constitutes a sale of goods under § 503(b)(9), and therefore the supplier’s claim against the Debtor enjoys an administrative priority claim under the Bankruptcy Code.

Rejecting the Debtor’s claim that the provision of electricity, an intangible phenomenon or service, is not covered under § 2-105(1) of the UCC, Judge Boroff In re Erving Industries, Inc., ___ B.R. ___, 2010 WL 1416148 (Bankr. D. Mass. Apr. 7, 2010) (downloadable from http://www.hendelcollins.com/website_pdfs/erving_apr_2010_decision.pdf) first applied the scientific description of electricity concluding that “although the ultimate nature may be mystifying to most, electricity is tangible and does possess physical properties.” In distinguishing it from telecommunication signals, the court distinguished a marked difference between electricity and telecommunication signals in both physical attributes and the purposes for which they are purchased. Electricity is not “merely a medium of delivery, but is the thing the customer seeks when purchasing electricity.” Telecommunication signals are mechanisms by which non-goods like ideas, sounds, and images are sent from one location to another.

In addition, Judge Boroff found electricity easily meets the movability and identifiability requirement of § 2-105(1) of the UCC. In the debate whether electricity is movable at the time it is identified to the contract for sale, the Court disagreed with the Debtor’s conclusion that electricity is consumed at the same time it is identified by a meter and thereby no longer movable. In contrast, he found electricity continues to move past the meter, through the wiring, to the products seeking to be electrified, albeit at imperceptible speeds, and therefore is movable at the time it is identified to the contract.

The Court addressed the “predominant factor test”, in which the Court would view electricity as part-good, part-service, and decide which one is more predominant. Judge Boroff concluded the test to be irrelevant as to the value of the goods within the meaning of §503(b)(9).

The decision is on appeal as of this posting to the Bankruptcy Appellate Panel. Hendel & Collins, P.C. represents the Debtor. In the event this ruling stands, however, future debtors contemplating a trip through Title II will have to worry about one more expense that would have to be paid in full prior to emerging from Bankruptcy. An already expensive excursion through the Bankruptcy Court would get that much more expensive and risky.

Supreme Court decides United Student Aid Funds, Inc. v. Espinosa

2010-03-24T09:32:00.002-04:00

Here’s a very brief summary; the full opinion is available at http://www.supremecourt.gov/opinions/09pdf/08-1134.pdf.

Facts: A Chapter 13 debtor proposed a plan that would discharge a portion of his student loan debt without filing an adversary proceeding as required by Rule 7001(6). The United Student Aid Funds never objected to the plan (though it had notice of the plan and the confirmation hearing). The plan was confirmed and completed. After completion of the plan, the Department of Education (which had been assigned the note under its reinsurance agreement with United Student Aid Funds) attempted to collect the unpaid portion of the debt, and the Debtor filed a motion in the Bankruptcy Court seeking to enforce the discharge injunction.

Issue: Whether the Chapter 13 plan and discharge were void because: (1) debtor failed to file an adversary proceeding seeking to determine the dischargeability of the debt as required by the Federal Rules, (2) the Bankruptcy Court never found undue hardship as required by 11 U.S.C. 523(a)(8), and/or (3) United Student Aid Funds’ due process rights were violated.

Holding: (1 & 2) Although the Bankruptcy Court may have erred by failing to find undue hardship and by confirming the plan, the plan was not void ab initio. Because United Student Aid Funds failed to file a direct appeal in the context of the plan confirmation, it had essentially lost its ability to challenge the plan and the discharge order. (3) Although an adversary proceeding provides greater notice and more rights to the parties, United Student Aid Funds received notice of the plan and its confirmation. Its rights to due process, therefore, were not violated.

Consumer Bankruptcy Basics Part III: Chapter 7

2009-10-21T10:17:00.145-04:00

So you've read my last two posts and have decided that the benefits of filing bankruptcy outweigh the drawbacks. Now you have to decide what chapter to file under. For the average consumer debtor, your choices will be between filing under Chapter 7 or Chapter 13 (Chapter 11 is usually reserved for business bankruptcies and individuals with complex debt). Chapter 7 is commonly referred to as liquidation bankruptcy and Chapter 13 is known as wage earner's plan.

A future post will focus more closely on the process of filing for bankruptcy protection--right now, we are just talking about what you can expect from a Chapter 7 filing. As noted above, Chapter 7 is known as the liquidation chapter. The basic idea of Chapter 7 is to collect the assets of a debtor, sell them, and distribute the proceeds to the debtor's creditors.

Once a debtor files a Chapter 7 petition, a Trustee will be appointed. The Chapter 7 Trustee's job in a nutshell is to look out for the best interests of unsecured creditors and to liquidate and distribute the debtor's assets. Lets say, hypothetically, that a debtor has $200,000 in assets, and $600,000 in unsecured (non-mortgage) debts--$200,000 owed to creditor A and $400,000 owed to creditor B. The Trustee will sell the debtor's assets and distribute the proceeds on a pro rata basis. In our example, this means that creditor A will get $66,666.67 and creditor B will get $133,333.33. Remember from Part I that the debts will be discharged, so this is all the creditors will ever get paid--one-third of the amount actually owed to them.

This is obviously an over-simplified version of how the process works. First of all, the bankruptcy process itself generates certain expenses that usually come off the top--attorneys' fees, the Trustee's commission, and the like. Second, certain types of debts, such as child support and taxes, get paid in full before any other type of debt gets paid. Third, assets will almost never fetch their market value when sold by a Trustee--just as with a home foreclosure, there is basically a discount because of the bankruptcy and because the debtor is not a willing seller. In addition, recall from Part II that the debtor can exempt certain assets from the reach of the trustee.

Finally, remember that secured assets are often treated differently throughout the bankruptcy process. Secured assets usually include cars and real estate. The bank has a mortgage on them, which may be foreclosed. If a debtor has a house worth $300,000 (assume for the moment, that the house is not exempted, even though it often may be), and $270,000 is owed on the mortgage, the Trustee may sell the house, but must give the first $270,000 to the bank on account of the mortgage. Factor in the fact that the house will not fetch its fair market value at a bankruptcy auction and the costs of the auction itself, the chances of a Trustee getting any benefit for unsecured creditors from liquidating such a house are slim at best.

Speaking very generally, the average consumer debtor in a Chapter 7 case, assuming no shenanigans (see the upcoming Part VIII for a description of the shenanigans I'm talking about), can often get through a Chapter 7 without having to give much up, if anything, to the Trustee. This is because most of a family's assets are often either exempt or encumbered/mortgaged.

Stay tuned for next week when we discuss the Chapter 13.

Consumer Bankruptcy Basics Part II: The Drawbacks of Personal Bankruptcy

2009-10-14T08:53:00.013-04:00

Last week I introduced this series of posts on consumer bankruptcy with a description of the primary benefits of filing bankruptcy. This week we discuss a couple of the reasons that bankruptcy may not be the right choice for many individuals. Specifically, I am going to focus on the effects bankruptcy has on your credit and the distribution to creditors.

As we all know, the world runs on credit. A retail store is more likely to take Visa than a check these days. It is, therefore, important to most individuals that they have decent credit and have at least one major credit card. Much of what determines your creditworthiness is your FICO Score. Your FICO score is based on a scale of 300-850. I do not purport to be an expert on credit agencies or scores, and there are plenty of websites out there that can give you much more information on those subjects. Suffice it to say, however, a bankruptcy filing can decimate your credit score and will generally stay on your credit report for 10 years. A recent Baltimore Sun article notes that a bankruptcy filing can lower your Vantage Score (FICO's primary competitor score on a scale of 501 to 990) by 355-365 points. While it certainly is not impossible to get credit after you file for bankruptcy, it is definitely a lot more difficult for the average consumer. It's worth noting though, that if you are already considering bankruptcy, your credit score is likely on the decline in the first place--and, because all your debts will be discharged in bankruptcy (see last week's post), you know your score can't go much lower once you receive your discharge.

The other drawback of filing bankruptcy is the distribution of the bankruptcy estate to creditors. My post next week will focus in much greater detail on the mechanics, but essentially, once you file for bankruptcy, a "trustee" is appointed to manage the "bankruptcy estate." In Chapter 7, this means that a trustee will liquidate a debtor's assets and distribute them to creditors. In Chapter 13, this means that the debtor will have to continue making payments to creditors for 3-5 years.

Despite what i just said, don't let my statement that a trustee will liquidate assets scare you. Two types of assets will not get liquidated, and most consumer debtors often only have assets of these types. The first of these are encumbered (mortgaged) assets. Things like your house and car, assuming you don't have very much equity in them, will not get liquidated. Don't get me wrong, they can still be foreclosed, but because the bank has first crack at them, they will not be part of the bankruptcy estate so long as there is not enough equity for anything to be left over if the bank forecloses. So, if you keep making your loan/mortgage payments during and after bankruptcy, you will usually be able to keep your car and house.

The other type of assets that are protected from liquidation are exempt assets. The Bankruptcy Code (the volume of U.S. law governing the bankruptcy process) permits debtors to exempt certain items from the reach of creditors and the trustee. The exemption scheme is very complex, but without getting into too many details, depending on the state they live in, debtors can usually exempt specific assets including retirement accounts, at least some equity in a primary residence, and other items that the law deems to be too important to give up to creditors. Given some time, a bankruptcy attorney will often be able to figure out out to exempt most unencumbered assets for the average consumer debtor in financial trouble.

As was the case in last week's post about benefits of bankruptcy, there are obviously other drawbacks to filing for bankruptcy than those I've mentioned, but these are two big ones. My next two posts will focus on the two types of bankruptcies available to most individual debtors: Chapter 7 and Chapter 13.

Remember, this series of posts is not intended to be legal advice or a primer on how to file bankruptcy and navigate the process but rather a plain-English description of the process and the options available. Always consult a competent attorney before making decisions about taking legal action.

Judge Boroff Issues Opinion

2009-10-07T14:20:00.006-04:00

This is an interesting new Judge Boroff case from the District of Massachusetts. If an attorney represents a Chapter 7 Debtor, he cannot also undertake the representation of a third party (such as the Debtor's spouse) in an avoidance action (attempting to undo a transfer or sale of property) brought by the Trustee. The rationale is that counsel to a Chapter 7 debtor assumes duties to cooperate with the Trustee and that it would be a breach of those duties to accept any representation adverse to the Bankruptcy Estate.

Consumer Bankruptcy Basics Part I: The Benefits of Personal Bankruptcy

2009-10-07T11:20:00.034-04:00

In contemplating potential topics for a blog post this week, I was reminded of the debt-ridden Michael Scott, in NBC's The Office, attempting to free himself of his debt obligations by announcing to his colleagues in a loud voice, "I DECLARE BANKRUPTCYYYYYYYY!" Moments later, a coworker gently informed him, "I just wanted you to know that you can't just say the word 'bankruptcy' and expect anything to happen." Scott's response: "I didn't say it, I declared it."

This exchange, though comedic hyperbole, portrays a pervasive misunderstanding of the bankruptcy process and the bankruptcy options available to individual consumers. So, in an effort to provide individuals with a better understanding of their options and to dispel some common myths and misconceptions, I begin a multi-part series of weekly posts to explain the consumer bankruptcy process. This week, we begin with the benefits of filing for bankruptcy.

A brief disclaimer: To be clear, this series of posts is not intended to be legal advice or a primer on how to file bankruptcy and navigate the process, but rather a plain-English description of the process and the options available. Always consult a competent attorney before making decisions about taking legal action.

With that out of the way, we start with the benefits of bankruptcy. The two primary benefits of personal bankruptcy are the Automatic Stay and the Discharge.

The Automatic Stay is not something many people know about before they have gone through the bankruptcy process, but it can be a great source of relief and sanity to the consumer who is drowning in debt collection notices, phone calls, and perhaps even lawsuits and foreclosure notices. Within days of filing a bankruptcy petition, all collection calls and notices suddenly stop. Once a person files, creditors are notified of the bankruptcy and are "stayed" attempting to collect most types of debts. Most lawsuits and other legal actions are also stayed. And of great benefit to many consumers in these trying times, home foreclosures are also put on hold. While individual creditors (particularly the bank with the mortgage on your home) can get the Bankruptcy Court to grant relief from the Automatic Stay if certain conditions are met, the Automatic Stay provides at least a temporary reprieve and an opportunity to regroup and plan for the future.

The other primary benefit, and often the purpose of filing bankruptcy in the first place, is the Discharge. Discharge is the ultimate goal of most consumer bankruptcies. At or near the end of the process, the court will grant the debtor a "Discharge in Bankruptcy." The discharge basically declares that all debts acquired before the bankruptcy are discharged and may never be collected. After the discharge is granted, it becomes illegal to even attempt to collect a pre-bankruptcy debt. Essentially, the debt just goes away.

There are some exceptions to the discharge. For example, most debts to government entities like taxes and student loans are not discharged. Child support, alimony, and similar obligations likewise survive the discharge. In addition, creditors or the trustee (the professional responsible for ensuring that nonexempt available funds get distributed to creditors--see next week's post about the drawbacks of bankruptcy and the following week's post about the Chapter 7 option for more details) may object to the granting of a discharge if the debtor is guilty of fraud, concealing funds, or similar shenanigans. It is also worth mentioning that while the discharge prevents creditors from attempting to collect debts, they can still foreclose--so if you want to keep your house and car, you had better keep making those mortgage and car loan payments. (Secured debts, such as home mortgages and car loans, are actually a great deal more complex than I describe here, but this explanation gives you the general idea).

Those are the two primary benefits of filing bankruptcy. There are obviously others, including opportunity to work with the helpful and brilliant members of the bankruptcy bar, such as ourselves. Stay tuned for Part II next week about the drawbacks and costs associated with filing bankruptcy.

Hockey, Chapter 11, and the BlackBerry

2009-10-05T20:21:00.009-04:00

For an interesting example of how the business of professional sports and insolvency law intersect, consider the latest developments in the Phoenix Coyotes case. For those that do not know, in 1996, the National Hockey League approved the relocation of the Winnipeg Jets franchise to Phoenix, Arizona. Along with the move came a new name more fitting for the southwest: the Coyotes.

The move, however, did not turn out so well from a financial standpoint. After the relocation, the team never made a profit, and from 2004 to 2008, lost anywhere from $50 million to $117 million per year. Jerry Moyes, the majority owner of the team, had been funding the losses for some time until about August 2008, after which the NHL funded the continued losses for the 2008-2009 season. In early 2009, Moyes started looking for a buyer for the team, and had discussions with a number of potential buyers, including the NHL and an entity controlled by Jim Balsillie. Balsillie is one of the billionaire co-founders of Research in Motion, the Canadian maker of the ubiquitous BlackBerry devices. At some point, the NHL discussions went cold, leaving Balsillie as the only viable suitor.

Balsillie had been trying to buy an NHL team for some time to move to Hamilton, Ontario (about 40 miles from Toronto). So, shortly after the team (and some affiliated entities) filed for Chapter 11 protection in May 2009 (in the U.S. Bankruptcy Court for the District of Arizona), a Motion was filed seeking the approval of the sale of the team to Balsillie. The offer (which was for $212.5 million) was specifically conditioned upon the relocation of the team to a location of Balsillie’s choosing in Southern Ontario, Canada. The NHL objected, arguing that the NHL bylaws required league approval of any team relocation (and the NHL would not approve a new team in essentially the backyard of the Toronto Maple Leafs). Balsillie and the Coyotes argued that Sections 363 and 365 of the Bankruptcy Code effectively permitted the sale of the team free and clear of encumbrances and burdensome contracts, including the restriction that otherwise permitted the NHL to have veto power on team relocations. In addition to objecting to Balsillie’s purchase, the NHL submitted an offer to purchase the team. The NHL offer had an interesting twist of its own: although the amount being offered by the NHL would pay a significant dividend to creditors, its offer was conditioned on the sale proceeds being used to pay all except for 2 creditors it viewed as adversaries: Moyes (for, among other things, the funds he lent to his team to keep it afloat) and the legendary Wayne Gretzky (on a breach of contract claim for his contract, which runs through 2011, as head coach of the Coyotes).

The Court rejected both offers, but one rejection was more permanent than the other. The Court did not agree with Balsillie that the NHL bylaws were akin to a contract that could be rejected by the team, and therefore, given Balsillie’s often stated goal of moving the team to Ontario, denied that sale motion, with prejudice. With respect to the NHL offer, the Court was troubled with the condition that the proceeds be essentially earmarked to creditors other than Moyes and Gretzky, especially without the benefit of an evidentiary hearing to consider the validity of their claims. The NHL bid was denied without prejudice and the Court invited the league to modify its proposal to cure that defect.

A few days ago, Balsillie stated that he would not pursue an appeal of the decision. As of this post, the NHL has not submitted a revised offer. Given its investment in funding the team for over a year (into what is now the new 2009-2010 season), and the Court’s essentially “open invitation” to modify its bid, it would be hard to believe that the NHL will not ultimately be the successful purchaser of the franchise.

In terms of marketability of professional sports teams in bankruptcy cases, the upshot of the Court’s decision in this case is that the leagues (which typically reserve the right to approve relocations) hold essentially all the cards in controlling who the purchaser will be. This result is not necessarily consistent with what is in the best interests of creditors since the universe of buyers of sports franchises becomes limited to those parties whose interests are aligned with those of the league.

To see a pdf of the Court’s September 30, 2009 decision, please go to http://www.nhl.com/league/ext/pdf/phx_decision.pdf.

Welcome to the Bankruptcy Blog!

2009-10-05T10:04:00.002-04:00

Hendel & Collins, P.C., announces the launch of its new blog. Our intention is to provide updates, several times each week, concerning developments in bankruptcy, insolvency, and commercial matters. Check back often to stay updated on current events and law in the insolvency field.