Friday, October 14, 2016

Consumer Financial Protection Bureau Brought Down A Notch


Beverly Weiss Manne
Tucker Arensberg, P.C.
Pittsburgh, PA

Earlier this week the United States Court of Appeals for the DC Circuit issued its 110 page opinion concerning the Consumer Financial Protection Bureau (“CFPB”) and CFPB enforcement action in Case No. 15-177, PHH Corporation Et al vs Consumer Financial Protection Bureau (D.C. Cir. 10/11/16)(which can be found here).  The opening sentence of the opinion declares “This is a case about executive power and individual liberty,” which reflects the seriousness of the issues addressed.

Tuesday, September 20, 2016

Fourth Circuit Rejects FDCPA Claim Based on Stale Proof of Claim

By Gary M. Weiner
and Robert E. Girvan, III
Weiner Law Firm, PC
Springfield, MA

The Fourth Circuit recently held in Dubois v. Atlas Acquisitions, LLC, No. 15-1945 (4th Cir. August 25,2016) that the filing of a proof of claim based upon a time-barred debt does not violate the Federal Debt Collection Practices Act (FDCPA)(click on the case name to read the opinion).

Congress enacted the FDCPA to prevent debt collectors from using abusive and unfair debt collection practices.  Federal courts have consistently held that filing lawsuits or threatening to file lawsuits debts where the statute of limitations has run out is a violation of the FDCPA.  However, the Bankruptcy Code in § 502(b)(1) disallows claims, upon objection, of claims that are “unenforceable against the debtor…under any agreement or applicable law.”  Therefore, the question becomes whether the filing of a proof of claim on a time-barred debt is a violation of the FDCPA (akin to filing a lawsuit), or whether the Bankruptcy Code provides protection for Debtors for this very type of action.  The Fourth Circuit recently held in Dubois v. Atlas Acquisition, LLC, No. 15-1945 (4th Cir. August 25, 2016) that filing proofs of claim based on time-barred debts does not violate the FDCPA.

Saturday, August 20, 2016

7th Circuit Holds Section 1329 Permits Post-Confirmation Plan Modification

Randall Woolley
Askounis & Darcy, PC
Chicago, Illinois

Section 1329 of the Bankruptcy Code permits modification of a confirmed plan to increase or reduce the amount of plan payments.  However, trustees and creditors are seemingly reluctant to disturb a confirmed plan, in part because Section 1329 does not specifically set forth when modification is appropriate.  The Seventh Circuit recently held in Germeraad v. Powers, No. 15-3237 (7th Cir. June 23, 2016) that an increase in the debtor’s income after plan confirmation may serve as a basis for modifying the Chapter 13 plan in order to increase the amount paid to unsecured creditors.    

Wednesday, August 10, 2016

Crawford's Claim Defeated By . . . the Statute of Limitations

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

When the Eleventh Circuit found that a creditor could be sued for violating the FDCPA for filing a proof of claim on a time-barred debt, it caused quite a stir.    Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), cert den., 135 S.Ct. 1844 (2015).   However, when the case was remanded, it turned out that the suit, like the claim it sought to challenge, was beyond the statute of limitations.   Crawford v. LVNV Funding, LLC, 2016 U.S. Dist. LEXIS 104472 (M.D. Ala. 8/9/16).

Saturday, August 6, 2016

Eleventh Circuit Doubles Down on Crawford

Beau Hays
Hays, Potter & Martin, LLP
Peachtree Corners, GA

Following up on the recent post by Steve Sather reporting on the Eighth Circuit’s dismissive rejection of the Eleventh Circuit’s Crawford ruling that filing a time-barred claim in a bankruptcy case violates the FDCPA, we can report that the Eleventh Circuit recently doubled down on its position.  Johnson v Midland Funding, LLC, No. 15-11240, 2016 WL 2996372 (11th Cir. 5/24/2016)(the Nelson case, reported on by Steve, mentions this case)

What Happened

In March 2014, Aledia Johnson filed a Chapter 13 case in the Southern District of Alabama.  Midland Funding filed a claim for $1,879.71, to which Johnson objected.  On July 11, 2014, the Bankruptcy Court entered its Order granting the objection.  Coincidentally, on July 10, the Eleventh Circuit had handed down the decision in Crawford.  Entirely not coincidentally, on July 14, 2016, Johnson filed a putative class action asserting that Midland Funding had violated the FDCPA in the Southern District of Alabama, Johnson v Midland Funding, LLC, No.. 14-322-WS-C (N.D. Ala.).  Midland Funding, faced with the immovable object that is the Crawford precedent in the Eleventh Circuit moved to dismiss utilizing a new argument - that the FDCPA as applied by Crawford is in irreconcilable conflict with the Bankruptcy Code.

The trial court, in a fairly thorough opinion, agreed.  The Eleventh Circuit, however, reversed the trial court and held that there is no irreconcilable conflict that would lead to preemption of the FDCPA by the Bankruptcy Code.


Midland Funding's argument is based upon a rule of statutory construction which holds that when two statutes are in irreconcilable conflict, the newer statute is presumed to have been enacted with knowledge of the conflict and so constitutes an "implied repeal" of the earlier statute.  Since the FDCPA was enacted in 1977 and the current Bankruptcy Code dates from 1978, the Code will preempt the FDCPA in the case of a conflict.

Wednesday, July 13, 2016

Eighth Circuit Rejects Crawford Decision on Stale Claims

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

Creating a circuit split, the Eighth Circuit has rejected the Eleventh Circuit's Crawford ruling that filing a time-barred claim violates the FDCPA.    Nelson v. Midland Credit Management, Inc., No. 15-2984 (8th Cir. 7/11/16).

What Happened

In a scenario that has played out dozens of times in the past two years, a debtor filed chapter 13 and a creditor filed a proof of claim on a debt that was outside the statute of limitations.   Rather than simply objecting to the claim, the Debtor filed suit for violation of the FDCPA.   The District Court dismissed the case for failure to state a cause of action, resulting in an appeal to the Court of Appeals.   The Eighth Circuit affirmed.

How the Court Ruled

Under the FDCPA, a debt collector is not prohibited from attempting to collect a debt which is beyond the statute of limitations.   However, the debt collector cannot file suit or threaten to file suit.  In Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), the Eleventh Circuit found that filing a proof of claim was similar to filing suit to collect a debt.    The Eighth Circuit disagreed, distinguishing Crawford in four short paragraphs.

Monday, June 20, 2016

Fourth Circuit Precludes Modifying Default Interest on Home Mortgage Loan

By Reuel Ash
Ulmer & Berne, LLP
Cincinnati, OH

The Fourth Circuit recently decided that the provisions of Bankruptcy Code Sections 1322(b) allowing Chapter 13 debtors to cure a prepetition mortgage arrearage do not enable debtors to bring the interest rate on the mortgage note to its original rate, where the default rate had been in place prepetition. Anderson v. Hancock, No. 15-1505, 2016 WL 1660178 (4th Cir.Apr. 27, 2016)(click on citation for link to opinion). This case sensibly limits the scope of modification by debtors of residential first mortgages, which is consistent with Congress’ intention of protecting mortgage holders in the residential market.

What Happened

The facts of the case may stated simply.  The debtors bought a $255,000 house, which was financed by a seller mortgage for a 30–year term at an interest rate of 5%.  The promissory note provided a default rate of interest of 7%.  The debtors defaulted, and the mortgagees sent the debtors a notice of default invoking the default rate of interest, but the mortgagees did not accelerate the note.  The debtors made no payments after being notified of the default, and the mortgagees initiated foreclosure proceedings.  The debtors filed a Chapter 13 bankruptcy case to stop the foreclosure. 

The debtors filed a Chapter 13 plan that proposed paying off the arrearage over a 60 month term at the note’s original interest rate of 5%, and reinstating the original maturity date along with proposing post-petition note payments at the 5% original interest rate.  The mortgagees objected to the plan, contending that the default interest rate of 7% must apply to both the repayment of the arrearage and the post-petition payments going forward.
The Fourth Circuit’s Ruling
In finding for the seller mortgagees, the Fourth Circuit harmonized three provisions of Bankruptcy Code Section 1322(b): (b)(2), on the one hand, and (b)(3) and (b)(5) on the other hand.  On the one hand, Section 1322(b)(2) prohibits a debtor from modifying a first mortgage on the debtor’s residence.  On the other hand, Section 1322(b)(3) says that a plan may “provide for the “cure or waiver of any default,” and Section 1322(b)(5) provides that “notwithstanding  paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment after the date on which the final payment under the plan is due.”

The question before the court was whether the plan’s proposed change to the debtors’ rate of interest was part of a permissible cure under Sections 1322(b)(3) and (b)(5), or an impermissible modification of the note under Section 1322(b)(2).  The Fourth Circuit ruled that the plan’s providing for the original, pre-default interest rate was an impermissible modification of the note, and sustained the mortgagees’ objection to the Chapter 13 plan.  The debtor must pay the default rate of interest both on the arrearage and the note payments going forward.  The Fourth Circuit observed that while the “rights” that cannot be modified under Section 1322(b)(2) are not defined in the Code, case authority from the Supreme Court in Nobelman v. Am. Savings Bk, 508 U.S. 324, 329, 113 S. Ct. 2106 (1993), and the Fourth Circuit in In re Litton, 330 F.3d 636, 643 (4th Cir. 2003) held that such rights included those bargained for by the two parties and enforceable under state law (Nobelman), and that Section 1322(b)(2) prohibited “any fundamental alteration of a debtor’s obligations, e.g., lowering monthly payments, converting a variable interest rate to a fixed interest rate, or extending the repayment term of a note.” (Litton)  The Fourth Circuit also found that the core of Section 1322(b)(5) concerns the maintenance of payments, i.e. decelerating the promissory note and continuing paying the loan, thereby avoiding foreclosure.  


The Fourth Circuit reached the proper result. Allowing Chapter 13 debtors to change material terms of a loan contract post-petition, including a default interest rate provision, would cause a major torrent of problems in the first mortgage market, and conflict with secured creditors’ legitimate expectations that the terms of their loan documents cannot be altered in bankruptcy, other than deceleration.
That said, the Code language appears not to answer the question raised, since Section 1322(b)(5) does not define the limits of what note and mortgage rights a debtor may modify when its plan proposes to cure arrearages.  The Fourth Circuit had to fill in the silence in (b)(5) through case authority, policy arguments, and legislative history.  Clarity might be promoted by the inclusion in Section 1322(b) of a provision stating that contract rights other than acceleration clauses in first residential mortgages and notes may not be modified.

Tuesday, May 17, 2016

Supreme Court Embraces Broad Definition of Fraud

By Louis S. Robin
Law Offices of Louis S. Robin
Longmeadow, MA

Yesterday, the Supreme Court ruled that a debtor may not be discharged from a debt arising from a fraudulent transfer.   No. 15-145, Husky International Electronics, Inc. v. Ritz (5/16/16).   The case can be found here.   
In short, the principal of a debtor corporation transferred assets, without consideration, to other companies he controlled in order to avoid payment to creditors of the initial debtor corporation. The principal eventually filed under Chapter 7. 
The Supreme Court sent the case back to the Fifth Circuit which had found that section 523(a)(2)(A) requires a false representation.    Instead, Justice Sotomayor ruled that "actual fraud" was a broader concept. She provides an interesting review of “fraud” and “fraudulent transfers” dating back to 1571’s Statute of Elizabeth, finding that “fraud” was a very broad term, with “actual” meaning a more specific intent (so that the principal committed general fraud, but knew exactly what he was doing). The dissent of Justice Thomas centered on his concerns that (i) “fraudulent transfers” are not included in the phrase of “actual fraud” as defined under the common law and (ii) where, under 523(a)(2), “money, property [or] services [are] obtained by” actual fraud, no such items are “obtained by” in a fraudulent transfer context.

On remand, the Fifth Circuit will need to reach an issue that  it did not previously decide:  whether the owner of a company who initiates a fraudulent transfer to other companies he controls is personally liable.     Under Tex. Bus. Org. Code section 21.223(b), the court may pierce the corporate veil to hold a shareholder liable based on "actual fraud."   The District Court had found that Ritz was liable under this statute, but the Fifth Circuit did not decide the issue.   This highlights an issue in these types of cases since a debtor is not usually the “obligor” under a fraudulent transfer, only the transferor. Regardless of how the remand comes out, the Supreme Court has issued a decision that puts debtors on notice that any activities that can be interpreted as less than honest may not receive protection in bankruptcy.

Thursday, April 21, 2016

Seventh Circuit Finds Tax Sale Avoidable

By Andrew J. Abrams
Boodell & Domanskis, LLC
Chicago, Illinois

In Smith v. SIPI, LLC (In re Smith), 811 F.3d 228 (7th Cir. 2016), the United States Court of Appeals for the Seventh Circuit found that a lawfully conducted sale of real estate under Illinois’ tax sale procedures can be avoided if the sale was not for “reasonably equivalent value” for purposes of Section 548(a)(1)(B) of the Bankruptcy Code.   This decision is significant – particularly for attorneys in Illinois and other states that employ a similar “interest rate method” for collecting delinquent real estate taxes – in holding that, unlike with mortgage foreclosure sales, compliance with the Illinois tax sale procedures does not insulate a property’s tax sale to satisfy delinquent real estate taxes from avoidance actions. 

Friday, April 8, 2016

FDCPA Claim Based on "Community Discharge" Fails

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

A U.S. District Judge in Arizona  has ruled that the “community discharge” in bankruptcy does not grant an in personam discharge to a non-filing spouse, thus thwarting the FDCPA claim of a pro se litigant.   The case is important because it shines light on the parameters of a poorly understand aspect of bankruptcy law.   The case is Parker v. First Step Group of Minnesota, LLC, 2016 U.S. Dist. LEXIS 5372 (D. Ariz. 2016).

What Happened

John Parker was married to Regina Parker.   Regina filed chapter 7 and received a discharge.   John did not file.   Later the couple divorced.   

On February 4, 2015, First Step Group of Minnesota, LLC, a debt collector, sent a demand letter relating to a debt in the amount of approximately $3,500.   John responded by filing a pro se action contending that the debt had been discharged in his ex-wife’s bankruptcy and that the community discharge protected him.   Because he claimed that the debt had been discharged, he filed a suit under the Fair Debt Collection Practices Act.

The Defendants answered and file a motion for judgment on the pleadings under Fed.R.Civ.P. 12(c).   Defendants asserted that the community discharge did not relief John of his personal liability so that the FDCPA claim failed as a matter of law.

The District Court granted the motion.

The District Court’s Ruling

The Court explained that a motion for judgment on the pleadings was properly applied when taking all the facts alleged by the non-moving party to be true, the other party is entitled to judgment as a matter of law.  However, the Court is not required to accept the non-moving party’s assertions of law.   The standard for a motion for judgment on the pleadings is similar to that of a motion to dismiss for failure to state a cause of action.   The difference is that because it is filed after the pleadings are closed (that is, there is a complaint and an answer), it cuts off the plaintiff’s right to amend as a matter of right.

The Court offered a succinct explanation of how the discharge works—and does not—when only one spouse files bankruptcy.

First, people who don’t file bankruptcy don’t get a discharge.

When one spouse files for bankruptcy, the other spouse is not discharged of liability.  (citation omitted).   "Pursuant to 11 U.S.C. § 524(a), a discharge under (title) 11 releases the debtor from personal liability for any debts. Section 524 does not, however, provide for the release of third parties from liability." (citation omitted).
Section 524(e) provides that "[e]xcept as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt."
Opinion, pp. 3-4.

There is something called a community discharge but it only applies to property and only continues during the duration of the marriage.
Subsection (a)(3), through reference to section 541(a)(2), provides that (with some exceptions) a creditor cannot recover from the "interests of the debtor and the debtor's spouse in community property that is under the . . . joint management and control of the debtor." 11 U.S.C. § 524(a)(3); id. § 541(a)(2). Under Arizona law, "spouses have equal management, control and disposition rights over their community property."  (citation omitted).   Thus, "the effect of § 524(a)(3) is that all community property acquired post-bankruptcy is protected by the discharge." (citation omitted).
For the duration of the marriage, "§ 524(a)(3) can operate to provide nondebtor spouses with a de facto partial discharge of their separate debts by enjoining a creditor from attaching community property in which the nondebtor spouse has an interest." (citation omitted).   Although the personal liability of a nondebtor spouse survives the bankruptcy, this liability can only be enforced against separate property, not community property: "a judgment creditor of  the nondebtor spouse on a community claim loses the ability to collect from anything other than the judgment debtor's separate property." (citation omitted).
There is, however, a "temporal aspect" to this protection--"it applies only so long as there is community property." (citation omitted). "Dissolution of the marriage . . . terminates the community, at which point after-acquired community property loses its § 524(a)(3) protection." (citation omitted).
Opinion, pp. 4-5.  
Thus, John lost on two counts.   First, the “community discharge” did not protect him from receiving a collection letter because he remained personally liable on the debt.    Second, because he was divorced, there was no community property to be protected by the “community discharge” so that he lost this protection as well.

This case makes two important points.   First, a motion for judgment on the pleadings provides a better vehicle for resolving a case than a motion to dismiss for failure to state a cause of action.   If a rule 12(c) motion is granted, there is a take-nothing judgment rendered against the plaintiff.   An order dismissing a case for failure to state a cause of action will generally be made without prejudice to replead or to file a new suit with sufficient pleadings.    Thus, the motion for judgment on the pleadings provides more complete relief.

Second, the “community discharge” is not a true discharge.   Rather, it is an adjunct to the discharge granted to the filing spouse.   By protecting after-acquired community property, the community discharge protects the discharged spouse from an indirect attempt to collect a discharged debt by taking a judgment against the non-filing spouse and attaching community property in which the discharged spouse has an interest.    Thus, the non-filing spouse gets limited protection of his interest in community property based on the filing spouse’s discharge.   However, that protection does not wipe out personal liability and it does not last after the dissolution of the marriage.

Disclosure:   While my name does not appear on the opinion, I provided drafting assistance to local counsel.

Monday, March 14, 2016

Bankrupt Billionaire and Family Find No Automatic Stay Protection From SEC's Asset Freeze

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

The Second Circuit has held that efforts by the SEC to temporarily freeze assets alleged to be ill-gotten gains from a securities fraud scheme were excepted from the automatic stay by the police powers exception of section 362(b)(4).   SEC v. Miller, 808 F.3d 623 (2nd Cir. 12/18/15).   The opinion can be found here.   

What Happened

Brothers Samuel and Charles Wyly were officers and directors of various publicly traded companies.   They transferred millions of stock options to trusts and subsidiary companies in the Isle of Man.   They used the trusts as a vehicle to trade in the stock without disclosing their beneficial ownership.

On July 29, 2010, the SEC brought an enforcement action against the wily Wylys.   In May 2014, after a six week jury trial, the jury returned a verdict against them.   In September 2014, the Court ordered disgorgement of nearly $300 million representing taxes avoided on trading profits and a portion of the profits themselves.   

The SEC then sought an asset freeze order against the Wylys and sixteen members of their extended family.   Samuel Wyly and Charles's widow, Caroline, both filed chapter 11 bankruptcy proceedings in the Northern District of Texas.   They claimed that the asset freeze request was an attempt to collect a debt and therefore subject to the automatic stay.   After the bankruptcy filings, the family members were formally made parties to the action as "relief defendants."  

The District Court for the Southern District of New York held several hearings after which it entered an order freezing any assets that were ever property of the Isle of Man entities as well as any assets received from the Wylys after January 1, 2005.  The freeze allowed the relief defendants to use any assets that did not come from the tainted sources, as well as an allowance of $15,000 per month plus medical expenses, educational costs, legal fees and bankruptcy related costs.  

The District Court's order indicated an intent to work with the bankruptcy court in Texas and stated that the asset freeze would expire once the frozen assets were under the Bankruptcy Court's control.   In other words, the assets were only frozen until such time as they could be recovered by the appropriate Debtor-in-Possession or subsequently appointed trustee.   

The District Court issued an opinion in which it found that the SEC's actions did not violate the automatic stay because they were exercised in connection with its police powers.    

Fifteen of the relief defendants appealed to the Second Circuit.   The sixteenth relief defendant, Caroline Wyly, asked the Texas Bankruptcy Court to hold that the stay applied.   The Bankruptcy Court held that the police powers exception defeated the automatic stay.   In re Wyly, 526 B.R. 194 (Bankr. N.D. Tex. 2015).

The Second Circuit's Ruling

The Second Circuit agreed with the District Court (and the Texas Bankruptcy Court) that the police powers exception applied.    It described the purpose behind the police powers exception thusly:
(T)he purpose of the governmental unit exception “is to prevent a debtor from ‘frustrating necessary governmental functions by seeking refuge in bankruptcy court.’”  As the legislative history makes plain, “where a governmental unit is suing a debtor to prevent or stop [a] violation [constituting] fraud . . . or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.”
Opinion, pp. 16-17.  

The parties agreed that the SEC's enforcement action fell within the general bounds of the police powers exception.   However, they argued that it fell within an exception to the exception.
In the instant case, all parties agree that the SEC’s regulatory enforcement action against the Wyly Brothers falls within the governmental unit exception.  The Relief Defendants assert, however, that this case falls under an exception to the governmental unit exception. This “exception to the exception” provides that actions to enforce money judgments are subject to the automatic stay, even if they were otherwise pursued by a governmental unit in furtherance of the government’s police or regulatory powers.  Accordingly, the Relief Defendants argue that the asset freeze order is subject to the automatic stay. The SEC counters that the asset freeze order does not fall within the money judgment “exception to the exception” and hence does not trigger the automatic stay.
Opinion, p. 17.

 The Court distinguished its prior decision in SEC v. Brennan, 230 F.3d 65 (2nd Cir. 2000) to find that the stay did not apply.   The Court based its ruling on factual, procedural and policy distinctions.

 Factually, the Court found that the asset freeze order was not an impermissible enforcement of a money judgment.

Here, the applicable order is merely an asset freeze, which, unlike the order in Brennan, neither transfers ownership, nor vests control over assets in the courts, nor—given its numerous exemptions for legal, medical, educational, and other uses, as well as generous living expenses—entirely deprives the Relief Defendants of their use. To be sure, the asset freeze order entered by the District Court does temporarily burden the use of certain assets. It does not, however, rise to the level of impermissible enforcement of a money judgment.  Unlike the repatriation and deposit order in Brennan, the asset freeze seeks not to modify or transfer assets in any way, but rather, merely to “preserve the status quo in anticipation of a final judgment.
Opinion, pp. 19-20.

The Court also found that procedurally, an asset freeze entered prior to judgment was not a naked attempt to collect a judgment.
In Brennan, we instructed that “the line between [unstayed] police or regulatory power on the one hand, and [stayed] enforcement of a money judgment on the other, [must] be drawn at entry of judgment.”  In other words, “up to the moment when liability is definitively fixed by entry of judgment, the government is acting in its police or regulatory capacity. . . . However, once liability is fixed and a money judgment has been entered, the government necessarily acts only to vindicate its own interest in collecting its judgment.
Opinion, p. 21.

Finally, and perhaps most importantly, the Court found that the asset freeze order complimented the bankruptcy court's jurisdiction rather than threatening it.
No conflict exists between the proceedings in the District Court and those in the Bankruptcy Court. This asset freeze order is narrowly framed to exclude assets in the bankruptcy proceeding and to be lifted as soon as the assets are clearly under the control of the Bankruptcy Court. Indeed, the Bankruptcy Court itself endorsed the freeze as “neatly avoiding duplication of judicial effort between the SEC Action and these bankruptcy cases.”  What is more, the Bankruptcy Court determined that enforcing the automatic stay “may ultimately accomplish little” since the SEC would likely seek relief from the stay to proceed against the Relief Defendants in its enforcement action.   Though it stopped short of deciding such a hypothetical motion, the Bankruptcy Court strongly indicated its own inclination to avoid extending the automatic stay to cover this case: “From the standpoint of judicial economy, it likely would make the most sense for the District Court, in one coordinated proceeding, to liquidate the amount of alleged ill‐gotten gains of the securities fraud that all relief defendants allegedly received and still possess.”

Under these circumstances, the entry of the asset freeze order here does not contravene the first policy of “centraliz[ing] all disputes concerning property of the debtor’s estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.”   Moreover, the asset freeze order is fully consistent with the second policy of “prevent[ing] a debtor from frustrating necessary governmental functions by seeking refuge in bankruptcy court.”   The Wylys initiated bankruptcy proceedings and invoked the automatic stay mere days after the SEC filed its then‐pending motion for an asset freeze. The timing speaks loudly for itself. 

Opinion, pp. 24-25.

As a result, the Court concluded that the automatic stay did not apply.

What It Means

At first blush, it seems counter-intuitive that an action by the SEC to freeze assets was not an attempt to enforce a money judgment.   However, upon further reflection, it seems clear that both the SEC and the District Court took a nuanced approach to preserve assets until they could be brought into the bankruptcy estate.  The SEC learned how to get the result it wanted while avoiding the result from the Brennan case.   The close coordination between the District Court and the Bankruptcy Court makes it clear that the two courts were working towards a common end rather than competing with each other.   Thus, the Second Circuit's ruling seems quite sensible.    

Monday, March 7, 2016

Texas-Based Debtor Stays Bound by Delaware Venue's Gravity

By Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX
The bankruptcy case of Texas restaurant chain Black-Eyed Pea will remain in Delaware after the Bankruptcy Court found that it would be too costly to move the case to the district where its operations are based.  In doing so, the Court found that the interests of the largest creditors outweighed the interests of the more numerous Texas-based creditors.     In re Restaurants Acquisition I, LLC d/b/a Black-Eyed Pea, Case No. 15-12406 (D. Del. 3/4/16).   The opinion can be accessed here.

About the Debtor

The Debtor is a Delaware limited liability company.   Prior to bankruptcy, the Debtor operated thirty restaurants, all located within Texas.   However, by the petition date, it had slimmed down to just twelve stores.    The Debtor employed approximately 530 employees and staff, all but four of whom reside in Texas.   However, the Debtor's management is located in Hendersonville, Tennessee.    

This was not a particularly large case.   The Debtor reported assets of $7.5 million and liabilities of $14.7 million.    The Debtor's secured lenders consisted of CNL Financial Group, which is located in Florida, AmEx Bank located in Salt Lake City and CFG XV, Inc. located in Florida.   Sixty-five percent of the creditors on the list of 20 largest unsecured creditors were located in Texas.    The Debtor owed the State of Texas somewhere between $200,000 and $4 million based on a tax audit.   If the audit was resolved in the State's favor, it would be the single largest creditor in the case.    

Tuesday, March 1, 2016

Impressions of Capitol Hill

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

Growing up, I remember hearing “I’m just a bill, sitting on Capitol Hill” on Schoolhouse Rock.   In college, I was a political science major.    However, I had never actually gone to Washington to try to influence the legislative process.    That all changed on Leap Day, February 29, when I participated in the Commercial Law League’s Hill Day.

A group of thirteen of us from Texas, California, Minnesota, North Carolina, Idaho, Delaware and Iowa met in Washington to advance three of the League’s legislative agenda items.  One of the things that sets the Commercial Law League apart from some of its peers is that it takes positions on legislative issues as well as filing amicus briefs in cases.    Our group focused on bankruptcy venue reform, preference reform and FDCPA reform.   I was part of the venue team.