Monday, August 31, 2015

What Does Gay Marriage Mean for Bankruptcy?

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

The recent Supreme Court decision requiring states to recognize same-sex marriages has generated substantial controversy in the political world, but what does it mean for bankruptcy courts?   The obvious answer is that more people will be able to file joint bankruptcy petitions than before.   However, going from a system where some marriages were legally recognized in certain jurisdictions but not others to one where they must be permitted everywhere is likely to result in confusion for practitioners and courts alike for years to come.    This post will attempt to point out some of the issues involved.

A Short History of Same-Sex Marriage in the United States

For most of the nation’s history, marriage was limited to couples of different genders.   In 1996, Congress passed the Defense of Marriage Act which prohibited the United States government from recognizing any marriage other than one between a man and a woman.   In 2003, the Massachusetts Supreme Court entered a ruling which made that state the first in the nation to recognize same sex marriage.    As a few other states followed suit, it became possible to have a marriage which was sanctioned by a particular state but not by the federal government.

Thursday, August 27, 2015

Growing Marijuana Can Be Problematic Both In Bankruptcy and Out

By Judith K. Fitzgerald
Tucker Arensberg, P.C.
Pittsburgh, PA

Frank Arenas is licensed in Colorado to grow and dispense medical marijuana.  He and his wife own a building, half of which is used for the cultivation and the other half of which is leased to a marijuana dispensary.  These activities are legal in Colorado, but, despite then Attorney General Eric Holder’s expressed willingness to work with Congress[i] to reschedule marijuana and remove it from the Schedule I (high potential for abuse) drug list[ii], 21 U.S.C.  §856(a) has not been amended.  Thus, knowingly opening, renting, using or maintaining any place, even temporarily, for the purpose of manufacturing, distributing or using any controlled substance is a federal crime.  Similarly, 21 U.S.C. §841(a)(1) makes it unlawful for any person knowingly or intentionally to manufacture, distribute, or dispense or possess with intent to do so, a controlled substance.

When Mr. Arenas tried to evict his tenant and lost the effort, resulting in a judgment that Arenas could not pay, he and his wife filed Chapter 7.[iii]  They listed their nonexempt marijuana plants with a value of $6,250 and their building as worth $262,725 but over-encumbered with liens.  The trustee initially filed a notice of no distribution but withdrew that notice after he received some indication that a purchaser would take the property.  He consulted with the United States Trustee (“UST”) to determine whether he could administer the property.  The UST said no and filed a motion to dismiss the case for cause because the property could not be administered without violating federal law.  In response, the Debtors moved to convert their case to Chapter 13.  The bankruptcy court denied the motion to convert and dismissed the case.  Debtors appealed to the Tenth Circuit Bankruptcy Appellate Panel (“BAP”).

Thursday, August 13, 2015

Bankruptcy Court Considers When an Attorney Is an “Initial Transferee” of Funds That Were Deposited Into a Trust Account

By Michael Riela
Vedder Price
New York, NY

In Horwitz v.Montroy (In re Select Tree Farms, Inc.), A.P. No. 15-1014, 2015 WL 4594076 (Bankr. W.D.N.Y. July 17, 2015), the United States Bankruptcy Court for the Western District of New York held that an attorney was not an “initial transferee” for purposes of Section 550(a) of the Bankruptcy Code with respect to funds that were deposited into the attorney’s trust account and later used to pay the debtor’s creditors.  However, the bankruptcy court also held that the attorney was an “initial transferee” with respect to funds that were deposited into the trust account and later used to pay the attorney’s own fees.

This case highlights some of the circumstances under which funds that are deposited into a trust or escrow account may be subject to recovery claims in a bankruptcy case.


George A. Schichtel was the president of Select Tree Farms, Inc. and managed its operations.  Shortly before it commenced its Chapter 11 case on March 7, 2012, Select Tree Farms issued six checks that were payable to three creditors.  Those checks were signed by Mr. Schichtel.  The drawee bank dishonored those checks because of insufficient funds, and the three creditors subsequently filed complaints that resulted in the prosecution of criminal charges against Mr. Schichtel under New Jersey law.

Friday, August 7, 2015

Second Circuit Holds That a Chapter 11 Plan May Extinguish a Lien When the Lienholder “Participates in the Bankruptcy Proceedings”

By Michael Riela
Vedder Price
New York

 In City of Concord v. Northern New England Telephone Operations LLC (In re Northern New EnglandTelephone Operations LLC), No. 14-3381, 2015 WL 4619576 (2d Cir. Aug. 4, 2015), the Second Circuit considered the circumstances under which a Chapter 11 plan extinguishes a lien.  Notably, although the general rule is that liens may pass through a bankruptcy unaffected, the Second Circuit held that a Chapter 11 plan can extinguish a lien when the lienholder had participated in the bankruptcy proceedings (by, for instance, filing a proof of claim in the bankruptcy case).  This case is an important reminder that if you are a secured creditor, there is a risk to simply filing a proof of claim in a Chapter 11 case and not diligently defending your lien rights thereafter.

Wednesday, August 5, 2015

Texas Judge Fires Shots on Venue

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

Come back to Texas
It's just not the same since you went away
Before you lose your accent
And forget all about the Lone Star State
There's a seat for you at the rodeo
And I've got every slow dance saved
Besides the Mexican food sucks north of here anyway

--Ohio (Come Back to Texas) by Bowling for Soup

Texas Bankruptcy Judge Russell Nelms has authored a thoughtful opinion on venue and a challenge to Texas companies who file in far off forums.  No. 15-41545, The Crosby National Golf Club, LLC (Bankr. N.D. Tex. 8/3/15).

The Case At Hand

The case in front of Judge Nelms involved a San Diego golf course that was having difficulties with the gated communities which surrounded it.   The company's management was based in Ft. Worth which is where the case was filed.   One of the homeowners' associations moved to transfer venue while the Debtor and its Texas-based bank sought to keep the case in Texas.

Sunday, August 2, 2015

Taxpayers Request Cert to Determine Whether IRS Entitled to Special Status in Alter Ego Determination

George Orwell famously said that, "all animals are equal, but some animals are more equal than others."   A petition for writ of cert filed on July 20, 2015 challenges the 9th Circuit's ruling upholding a District Court which found that the IRS was more equal than other creditors when it came to an alter ego determination.    The case is No. 15-102, Robert A. Polittle, et al v. United States of America.

 The Polittes owned several Midas franchises in California through two corporations.   According to the Polittes, their CFO stopped paying employment taxes for one of their companies in 1998 and used his background as a CPA to conceal this fact from them.   The IRS did not detect the non-payment until 2005.    By this time, taxes of $5.3 million had accrued.   After selling all of the assets of the company, the tax debt managed to grow to $11.7 million.   The IRS then filed nominee liens against the Polittes and a second corporation which they owned.    The IRS collected about $1.7 million from sale of two condominiums owned by the Polittes and all of the assets of their other corporation.   The Polittes filed a refund suit against the IRS in U.S. District Court.