Friday, April 13, 2018

Better Think Twice Before You Tell Your Debtor Client to Pay You with a Credit Card

Jeffrey N. Schatzman
Schatzman & Schatzman, P.A.
Miami, Florida

If you represent individual debtors and take credit cards for payment of your fees, you might want to re-think that policy.  On March 30, 2018, the Eleventh Circuit Court of Appeals in Cadwell v. Kaufman, Englett & Lynd, PLLC, Case No. 17-10810, reinstated a suit against Kaufman, Englett & Lynd (“KEL”) for violation of 11 U.S.C. Sec. 526(a)(4).   You can find the opinion here.

Requiring Credit Cards Concerns Client

Loyd Cadwell had sought the services of KEL to file a chapter 7 bankruptcy case.  Following the initial meeting, Cadwell entered into a retainer agreement with KEL that provided for KEL to be paid a fee of $1,700.00 to represent Cadwell in the chapter 7 case.  The agreement provided for payments to be made in installments over several months.  Cadwell alleged in his complaint that he was instructed by KEL to make the installment payments by credit card. Cadwell made the initial payment and three additional installments with two different credit cards.  Thereafter, Cadwell terminated the engagement with KEL and sought the services of another firm to assist him with his bankruptcy.

Cadwell’s new attorneys noticed the credit card payments and filed suit on behalf of Cadwell for violation of 11 U.S.C. § 526(a)(4), seeking return of fees paid to KEL and punitive damages of $1 million.  The lawsuit is also proposed as a class action.   

Thursday, March 1, 2018


Hon. Judith K. Fitzgerald (Ret.)
Tucker Arensberg, P.C.
Professor in Practice, University of Pittsburgh School of Law

Once in a while, a Supreme Court opinion crosses my desk that I cannot ignore. Such was the case today. The United States Supreme Court issued its opinion in Merit Management, LP v. FTI Consulting, Inc., a unanimous opinion made more exciting by the fact that it affirmed the Seventh Circuit’s decision regarding the scope of the safe harbor provisions of 11 U.S.C. § 546(e) in a case that arose from a failed harness racing endeavor. (The opinion can be found here). Perhaps even more surprising, the Court interpreted a section of the Bankruptcy Code that led to a split in the circuits using a “plain meaning” approach.

Saturday, November 11, 2017

Secured Lenders Take Note! In re Sunnyslope is something you want to know about

Hon. Judith K. Fitzgerald (Ret.)

In re Sunnyslope Hous. Ltd. P’ship, 859 F.3d 637 (9th Cir. 2017), as amended (June 23, 2017)(“Sunnyslope”), is a noteworthy case for secured lenders.  The case involves confirmation of the cram down plan proposed by Sunnyslope Housing Limited Partnership (the “Debtor” or “Sunnyslope”) in its Chapter 11 bankruptcy case. The dispute now in the courts concerns what a debtor must pay under a plan if the debtor proposes to keep real property over the objection of a secured lender.
In Sunnyslope, the United States Court of Appeals for the Ninth Circuit, sitting en banc, created a split with the Seventh Circuit and other lower courts in finding that Associates Commercial Corp. v. Rash, 520 U.S. 953, 965, 117 S.Ct. 1879, 1886, 138 L.Ed.2d 148 (1997) (“Rash”), mandated the application of the replacement-value standard. The Supreme Court defined that standard as the amount a willing buyer would pay on the open market for like property.
Sunnyslope involved a low income housing project.   So long as the Debtor owned it, it could only be used for that purpose.  However, if the lender foreclosed, it would be free to dispose of the property as it wished.  Thus, the case posed the paradox of a property worth less as a going concern than in a liquidation.
The Sunnyslope Decision. In Sunnyslope, the secured lender, First Southern National Bank (“FSNB”), argued that the foreclosure value of the property should have been used to determine the amount of its secured claim under §506(a)(1). Before the bankruptcy was filed a state court receiver had obtained a purchase offer that was much higher than the value that the debtor attributed to the property in its plan. The key difference for valuation was that Sunnyslope proposed to continue using the property for low-income housing and valued it that way. FSNB objected, contending that the use restrictions would be divested through foreclosure, thereby enabling the property to be used for a higher and better purpose. The valuation difference was significant. Without use restrictions, the purchase offer was $7.65 million. In its bankruptcy, Sunnyslope proposed a value of $3.9 million because of the use restrictions. The bankruptcy court confirmed the debtor’s plan that proposed to pay the secured lender only $3.9 million, with interest at 4% (a lower rate than in the original loan), over 40 years, with a balloon at the end. Through this plan, the lender would recover significantly less that the $7.65 million foreclosure value.
The Split on the Correct Test for Value. Whether a bankruptcy court is required to apply only replacement value is open to debate and academics and judges strongly disagree. Some feel that Rash is limited to Chapter 13 cram down cases and/or to personal property valuation.  Rash involved a chapter 13 plan and the proposed retention of a truck, so foreclosure value was significantly lower than replacement value. But other courts have not conceded that Rash applies in Chapter 11 cases or in cases involving real property. For example, in United Air Lines, Inc. v. Reg’l Airports Imp. Corp., 564 F.3d 873 (7th Cir. 2009), in valuing airline terminal gates that the debtor had improved, the Court of Appeals for the Seventh Circuit determined that foreclosure value operates to set a floor on the secured creditor’s recovery. That court stated: “[i]f the Lender foreclosed and took over the space, it could rent the gates to United or some other airline at more than $17 a square foot- at perhaps four times that much, to go by prices at the airport’s one terminal that leases fully built-out gates.” Id. at 876-77.
The Third Circuit Court of Appeals has articulated a somewhat different standard.  In In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir. 2012), the court adopted the replacement value standard identified in Rash, and applied it in a case that involved real property. However, that court equated replacement value with the asset’s fair market value, as “most respectful of a property’s anticipated use.” Id. at 142.
The variation in approaches leads to a lack of uniformity in the bankruptcy process and calls into question what valuation standard applies to confirmation of a cram down plan.  When a debtor chooses to retain the collateral rather than to return it to the secured creditor, the Bankruptcy Code requires the plan to provide the creditor “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property.” § 1129(b)(2)(A)(i)(II). Does Rash mandate the use of replacement value even when that valuation method returns less to the secured creditor than it could obtain on its own using its state law rights? Until the Supreme Court decides the issue, debtors and secured creditors are in limbo.
Supreme Court Review. In an effort to have uniformity added to asset valuation in cram downs, as an amicus party, I initiated a brief that has been filed  with the United States Supreme Court, asking that Court to accept a writ of certiorari to the Ninth Circuit and decide the question.  I have been joined by several academics who specialize in bankruptcy law and other retired bankruptcy judges.  The amici take no position on the merits of this question but join together in an effort to have the Supreme Court clarify whether Rash applies to Chapter 11 cases where real property is retained by the debtor.
A copy of our brief can be accessed here Amicus Brief
The amici are represented by Beverly Weiss Manne, Richard Tucker III, and Matthew Burne of Tucker Arensberg, P.C. with offices in Pittsburgh, Harrisburg and Manhattan.


Sunday, October 15, 2017

CLLA Programs at NCBJ: Bankruptcy and the Supreme Court, Debtor Asset Protection Trusts and Jevic--The Inside Story

Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

The Commercial Law League presented a full slate of programs at the National Conference of Bankruptcy Judges in Las Vegas this year.   The program lead off with a luncheon including the presentation of the Lawrence King Award and a Keynote Address by Erwin Chemerinsky and then moved to two panels on Debtor Asset Protection Trusts and Jevic--The Inside Story.  Taken together the programs offered a deep dive into all things bankruptcy and insolvency related.

The King Award

The CLLA presented this year's Lawrence King Award to Prof. Nancy Rapoport of the University of Nevada, Las Vegas School of Law.

Nancy Rapoport is the Special Counsel to the President of the University of Nevada, Las Vegas, the Garmin Turner Boyd Professor of Law at the William S. Boyd School of Law and an Affiliate Professor of Business Law and Ethics at the Lee Business School.    She has served as Dean or interim Dean of three separate law schools.   

Saturday, June 3, 2017

Supreme Court Says No FDCPA Liability for Time-Barred Claims

By Louis Robin
Law Offices of Louis Robin
Longmeadow, MA

The Supreme Court, in Midland Funding, LLC v. Johnson, issued on May 15, 2017, has ruled that the filing of a proof of claim which is otherwise barred by the applicable statute of limitations is not a violation of the Fair Debt Collection Practices Act. 

There were two issues before the Court.  First, whether the filing of a proof of claim constituted a “false, deceptive, or misleading representation”, and, second, whether the creditor was using any “unfair or unconscionable means” to collect a debt.  §§1692e and 1692f.  Regarding the first, the Court found that the creditor was not making a false, deceptive or misleading representation because a claim under the Bankruptcy Code is a “right to payment” and under many (but not all) state laws the “passage of time extinguishes the remedy but not the right”.   Similar, the Bankruptcy Code defines claims broadly, nothing restricts the definition to only enforceable claims, and Bankruptcy Code §502(b)(1) provides that, if a “claim” is “unenforceable” it will be disallowed (recognizing the difference between the claim and enforceability). 

The Court had a more difficult time concerning the standard of “unfair or unconscionable means”.  Justice Breyer, writing for the 5 – 3 majority, essentially ruled that the Bankruptcy Court case was not a civil action commenced by the creditor (where most courts find the assertion of a stale claim is an FDCPA violation).  Justice Breyer also ruled that Rule 9011 standards, may not be applicable to filing of stale claims.

Justice Breyer usually writes with a clarity that may be lacking in this case.  It is troubling that a creditor can knowingly file a claim which the creditor knows will be voided when a trustee or debtor files an objection.  Perhaps I am relying more on common sense than technicalities (which, as lawyers, we should be familiar), but there must be an element of practicality in the application of standards, otherwise routine reliance on the laws may be questioned.   

The dissent, written by Justice Sotomayor (and joined by Justices Ginsburg and Kagan), provides such clarity (which may be easier to provide in a dissent).  After providing some background and history of the practices of debt collectors seeking collection in state courts for stale debts (and finding severe penalties), Justice Sotomayor states that statutes of limitations “are not simply technicalities” but represent strong public-policy determinations that “promote justice”.  Justice Sotomayor then provides several pages of discussions on how the majority’s reasoning does not serve the dynamics nor purposes of the Bankruptcy forum and purposes.  I will not try to summarize the Justice’s words further, but suggest that one read these words as they give some solace to bankruptcy practitioner and the issues they struggle with on a day to day basis.  Ironically, Justice Scalia, on occasion, provided similar empathy; see Justice’s Scalia’s dissent in Dewsnup v. Timm, 502 U.S. 410 (1992).  I understand that Justice Scalia had some background in the bankruptcy forum in the 1970’s, and perhaps Justice Sotomayor had some similar experiences.  There would be an element of irony if Justice Sotomayor took up the mantel from Justice Scalia. 

Now that I’ve said my peace, it might be fair to give you my perspective as my practice concentrates (although is not limited to) debtor representation.  Despite my (presumably) vigorous representation of debtors, I would tell you the following - I have occasionally told debtors that, after receiving a bankruptcy discharge, if circumstances change wildly, they should consider paying discharged debts (and such circumstances include winning the lottery).  Similarly, I do not have an issue with a creditor whose claim is time barred communicating with a debtor as long as it is plainly and conspicuously stated that the debt cannot be pursued in any civil action – debtors, presumably, have received benefits from the extension of credit, and there is a moral responsibility to pay debts.  I would remind all that debtors also have a moral responsibility to provide for themselves and their families food, shelter, and other necessities. 

But I still have issue with filing of claims that are time barred.  Even if trustees and/or debtors have Rule 9011 options, Rule 9011 requires the service of a motion prior to filing the motion so that the creditor has the opportunity to withdraw the claim prior to litigation.  This causes expenses are not reimbursed to the estate.  There may even be time restraints (see Massachusetts Local Rule 13-13 which requires filing of objections to claims within 30 days of the bar date deadline).  Filing of proof of claims, for which a plain affirmative defense is applicable, does not serve the bankruptcy forum.

Monday, April 10, 2017

Bad Proofs of Claim Can Be Very Expensive

Barbara M. Barron
Stephen W. Sather
Barron & Newburger, P.C.
7320 N. Mopac Expwy., Suite 400
Austin, TX  78701

The goal of filing a proof of claim is to collect money.   However, errors in submitting claims can prove costly.  Six different problems to avoid are illustrated below.

Failure to Attach Supporting Documentation

Cases Prior to 2011

B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931 (6th Cir. 2010)

            Creditor filed a proof of claim without supporting documentation.    The creditor withdrew the claim after the debtor objected.   The Court then issued an order to show cause directing the creditor to explain its business practices and the handling of this specific claim.   The Court found that B-Line violated Fed.R.Bankr.P. 9011 because it did not make a reasonable pre-filing inquiry that the claim was valid and supported by the evidence.   However, because the creditor cooperated in response to the order to show cause, the Court did not assess sanctions.   On appeal, the Court found that the controversy was not moot even though no monetary sanctions were assessed.   The Court found that the creditor could appeal a non-monetary sanction to avoid injury to its reputation.    The Court reversed the bankruptcy court’s sanctions order.   It found that because the creditor obtained warranties from the entity from whom it purchased the debt as to its validity and had a track record of purchasing claims from this buyer that were not objected to 99.5% of the time, the creditor had done a reasonable pre-filing inquiry.

When Can FDCPA Claims Be Brought Based on Actions Taken in Bankruptcy Court?

Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

            The Bankruptcy Code protects debtors from their creditors.   The Supreme Court has stated that “(t)he principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’”     Marrama v. Citizens Bank, 549 U.S. 365, 367 (2007).
The Fair Debt Collection Practices Act (“FDCPA”) has seeks to protect consumers from abusive debt collectors.  As explained in one recent opinion:
The FDCPA was enacted "with the aim of eliminating abusive practices in the debt collection industry." This legislation and its history "emphasize the intent of Congress to address the previously common and severe problem of abusive debt collection practices and to protect unsophisticated consumers from unscrupulous debt collection tactics."  The FDCPA "focuses on regulating interactions between 'debt collectors' and 'consumers.'" (internal citations omitted).

Cohen v. Ditech Financial, LLC, 2017 U.S. Dist. LEXIS 43443 (E.D. N.Y. 3/24/17) at *5-6.