Georgia Bankruptcy Blog

Chase Bank USA, N.A. v. Hampson (In re Hampson), 2009 Bankr. LEXIS 3412, Adv No. 09-4059 (Bankr. N.D. GA September 11, 2009) (Bonapfel).

Plaintiff Bank sought an order of nondischargeabilty for cash advances taken by the Debtor within 174 days of the filing of her Chapter 7 case. Debtor did not answer, and Plaintiff moved for default.  However, the Plaintiff failed to file the affidavit required by the Servicemembers Civil Relief Act.  Additionally, the Complaint did not allege that cash advances were taken within 70 days of the filing of the petition, as required by § 523(a)(2)(C).  The Complaint also failed to allege facts from which to conclude that the advances arose from false pretenses, false representations or actual fraud as required by § 523(a)(2)(A). 

In FDS National Bank v. Alam (In re Alam), 314 B.R. 834 (Bankr. N.D. Ga. 2004), this Court set forth the criteria for establishing nondischargeability under § 523(a)(2)(A). In Alam, the plaintiff, a credit card company, contended that each use of the debtor's available credit line for a purchase or a cash advance was a representation that he had the ability and intent to repay the debts incurred (the "implied representation theory"). The Court rejected this implied representation theory and instead held that, in order for a Plaintiff to prevail on a false representation or false pretenses claim, the plaintiff must show an express, affirmative representation made by the debtor to the plaintiff or use of the card after clear communication of its revocation... With respect to actual fraud, the Court also rejected the implied representation theory and held that "a debtor commits actual fraud for purposes of § 523(a)(2)(A) if the debtor uses a credit card without the actual, subjective intent to pay the debt thereby incurred." Id. at 841. Such a claim is established by showing sufficient facts from which the Court may draw an inference of the debtor's actual, subjective fraudulent intent. Id. at 843.

Based upon the above, the Court declined to enter a default against the Debtor.  Finally, Judge Bonapfel also expressed concerns about the lawyers for both parties:

The filing of this motion raises two troubling issues for the Court. First, five years after this Court's Alam decision, the Plaintiff's attorney has filed a complaint that ignores the holding of Alam. The Plaintiff's law firm cannot plead ignorance; it was also the firm representing the plaintiff in the Alam decision and, thus, is well aware of this Court's requirements for the pleading and proof of a § 523(a)(2)(A) and (a)(2)(C) claim. The continued reliance on the "implied representation theory" in such circumstances is a strategy that appears foolish at best (denial of motion for default judgment or dismissal of the claim), and reckless at worst (see 11 U.S.C. § 523(d)).

Just as troubling is the Debtor's attorney's disregard of this Court's instruction in In re Egwim, 291 B.R. 559, 580 (Bankr. N.D. Ga. 2003). The failure to respond to a complaint and motion that so plainly fail to state a factual basis for relief is an abdication of responsibility to the client. The Court notes that the Debtor's attorney has attempted to except representation in adversary proceedings from the scope of its representation of the Debtor. However, unless and until the Debtor's attorney is permitted to withdraw from representation, the Debtor's attorney has a responsibility  to the client to protect her interests. See In re Egwim, 291 B.R. 559, 580 (Bankr. N.D. Ga. 2003) ("A lawyer must represent the debtor in connection with all adversary proceedings and contested matters filed in the case which may affect the debtor's rights and interests unless and until the lawyer withdraws in accordance with BLR [9010-5(b)]."). Here, failing to respond had the potential for entry of a judgment against the Debtor, a result directly adverse to one of the Debtor's primary objectives - obtaining a discharge. Counsel for the Plaintiff and the Debtor are advised to govern themselves accordingly or face potential sanctions in this or any other future case.

In re McGuirk, 414 B.R. 878 (Bankr. N.D. Ga. August 31, 2009) (Bihary).  A creditor approached the Chapter 7 Trustee about purchasing the assets of the Chapter 7 Estate, including the avoidance actions (although the Trustee apparently believed there were no such actions available in the case).  A Motion to sell assets was filed, and an objection was filed by the debtor, who alleged improper motive on the part of the creditor.  The Court denied the Motion. 

This Court made it clear in a prior published decision that absent extraordinary circumstances, a trustee cannot sell, transfer, or assign the right to assert and maintain an estate's avoidance action to an individual creditor. In re Carragher, 249 B.R. 817, 820 (Bankr. N.D.Ga. 2000); see also In re Metro. Elec. Mfg. Co., 295 B.R. 7, 12 (Bankr. E.D.N.Y. 2003). The rationale for this is sound. The Bankruptcy Code gives trustees special powers to fulfill their primary duty of marshaling the debtor's assets for the benefit of the estate. A Chapter 7 trustee is appointed and trained by the United States Trustee and must have certain qualifications to be appointed. A single creditor does not have the training or qualifications to exercise the role of a panel Chapter 7 trustee. The trustee "is visibly the court-appointed representative of creditors, but a buyer is just another self-interested  party." ...The trustee's power to bring an avoidance action is one such power reserved exclusively for the trustee.

In limited situations, a court may grant a creditor derivative standing to bring an avoidance action.  Official Comm. of Unsecured Creditors of Cybergenics v. Chinery, 330 F.3d 548, 568 (3d Cir. 2003). However, Cadles is not seeking derivative standing; it seeks to purchase the Trustee's rights to bring avoidance claims in its own name. Derivative standing is granted to benefit the estate as a whole, not merely to benefit the creditor bringing the claim. Craig v. Green Light Capital Qualified, L.P. (In re Prosser), 51 B.C.D. 256, 2009 Bankr. LEXIS 2237 (Bankr. D.V.I. 2009). In addition, none of the elements justifying derivative standing has been established in this case. Neither the Trustee nor Cadles has established any colorable claim, and there is no indication that the Trustee has unjustifiably refused to bring any avoidance action.

 Cadles should not be surprised by this Court's ruling. See Reed v. Cooper (In re Cooper), 405 B.R. 801, 816 (Bankr. N.D. Tex. 2009) ("[T]he court will not allow Cadle [The Cadle Company] to usurp the role of the Trustee in this case and pursue estate causes of action")...

 

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It is not uncommon for financially distressed businesses to get behind on payroll taxes, especially when the company does not have a payroll service that handles the payment of all taxes and automatically deducts the full amount from the company's bank accounts.  Chapter 11 cases often have significant unpaid payroll taxes scheduled as a priority claim, after using the funds to pay other bills to stay afloat.

What happens when a company goes out of business (in or out of bankruptcy) and leaves behind unpaid federal withholding taxes (commpnly known as "trust fund taxes")?  The Fourth Circuit addressed that question in an opinion entered Wednesday.  See Erwin v. United States, No. 08-1564 (4th Cir. January 13, 2010) (click here for opinion). 

Mack Sperling has summarized this opinion in his North Carolina Business Litigation Blog.   He summarizes the situation where individuals can become liable for unpaid taxes:

• Employers are required to withhold social security and federal excise taxes from employee wages.
• Those withheld funds are held in trust for the United States, and are often referred to as "trust fund taxes."
• Once in the hands of the employer, those funds are held for the exclusive use of the government, not the employer.
• Even if the employer needs the withheld tax money to pay suppliers and vendors to keep the business operating as a going concern, it can't, because "the government cannot be made an unwilling partner in a floundering business."
• The Internal Revenue Code imposes personal liability for payroll tax on the officers and agents of an employer who are (1) responsible for "the employer's decisions regarding withholding and payment of the taxes" and (2) who willfully fail to see that the taxes are paid. 

You do not have to be an owner, officer or director to be a "responsible person" who has personal liability for these taxes.  If you have sufficient control over the company's payroll, which creditors to pay or not pay, the day-to-day business affairs and who to hire and fire, you could be liable. 

Click here to read Mack's detailed analysis of this opinion and individual liability for taxes.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Miles Properties, Inc., and several related entities, have filed Chapter 11 petitions in the Northern District of Georgia on January 8, 2010. The filing entities are listed below.  Miles is one of the largest developers and owners of apartment and condominium communities in the country, with its headquarters in Atlanta.  According to its website, it has 16 communities in Georgia and 36 total. 

The president of Miles, Daniel J. Miles, was already in bankruptcy.  An involuntary Chapter 7 petition was filed against him on December 8, 2009, Case No. 09-92601.  The case was later converted to a Chapter 11 case. Creditors in the personal case are seeking the appointment of a Chapter 11 Trustee in that case (click here for motion).

This is just the latest in a string of developers that have either filed for bankruptcy protection, allowed properties to be foreclosed upon, or just ceased operations.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Chapter 11 cases filed in December and January, through foreclosure day in January 2010.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

 RLI Ins. Co. v. Waters (In re Waters), Adv. No. 09-5014, 2009 Bankr. LEXIS 3865 (Bankr. M.D. Ga. Dec. 7, 2009) (J. Hershner). Debtor was the guardian of his minor son, who was injured in a car accident and received $15,522.74 in settlement proceeds.  Plaintiff was the issuer of a surety bond in the amount of $16,000 the probate case.

In 2003, the Probate Court determined that "After receiving said [settlement] funds, Teheran Waters [Defendant], guardian made numerous unauthorized expenditures or otherwise encroached upon the corpus without leave of the Court." The probate court determined that "[$ 11,755.09 of] expenditures itemized on the return are unauthorized and [are] the individual responsibility of the guardian [Defendant] and his wife."

Debtor subsequently filed a Chapter 13 case and Plaintiff filed an action to except the Probate Court award from Debtor's discharge pursuant to  § 523(a)(4), fraud or defalcation while acting in a fiduciary capacity.  Plaintiff filed a motion for summary judgment based on the Probate Court order, and Debtor did not respond.  The Court granted the motion.

The Court is persuaded that Plaintiff is the proper party to bring thisnondischargeability action. A surety who pays the debt of his principal is subrogated to all the rights of the creditor. The surety may proceed immediately against his principal for the debt paid. O.C.G.A. §§ 10-7-41,-56 (2009).

Plaintiff was called upon to honor its surety bond. Plaintiff is subrogated to all rights that the successor guardian could have asserted against Defendant. This includes the right to contend that Defendant's obligation is nondischargeable under § 523(a)(4)...  Defendant, as guardian, was already a fiduciary when he encroached upon the corpus of the settlement finds...The Court is persuaded that Defendant, as his minor son's guardian, was "acting in a fiduciary capacity" for purposes of § 523(a)(4).

Next, Plaintiff must show that Defendant committed a defalcation...The probate court, after a hearing where Defendant was represented by counsel, determined that Defendant, as guardian, "made numerous unauthorized expenditures or otherwise encroached upon the corpus without leave of the Court." A guardian, without leave of court, cannot spend money from the corpus of the ward's estate. Leigh v. Fears, 145 Ga. App. 644, 244 S.E.2d 616, 618 (1978). See O.C.G.A. § 29-2-2 (2003).

The Court is persuaded that collateral estoppel applies to the probate court's determination. The issue of mismanagement of funds was raised and litigated in the probate court proceeding and was necessary to the probate court's final decision. Defendant was represented by counsel. The probate court is a court of competent jurisidiction for purposes of collateral estoppel...

The Court is persuaded that Defendant, acting as a fiduciary, misappropriated funds of his ward for Defendant's personal use. The Court is persuaded that Defendant's obligation is nondischargeable under § 523(a)(4). The Court is persuaded that Plaintiff is entitled to summary judgment.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Carrie Teegardin of the Atlanta Journal published a story yesterday about the rising rate of personal bankruptcy cases in Georgia for 2009.  Click here for the story.  It certainly is not a surprise that the numbers are rising, given the significant drop-off after the 2005 amendments and the general state of the economy.  According to the statistics, Georgia is third in the nation in bankruptcies per household, with one case filed for every  50 households.  Only Nevada (one per 35 households) and Tennessee (one per 48.5 households)  had higher rates.

Interestingly, while Georgia has traditionally been a state in which Chapter 13 filings predominate, more than half of the 2009 cases (through November) were Chapter 7 cases.  Again, this is not a surprise given the state of the economy. 

According to local Chapter 7 Trustees, there is also a significant rise in pro se cases, where individuals file without a lawyer.

You can view the statistics for the Northern District of Georgia on the Court's website.  Click here for the filings by month for 2009 and the several previous years. When the December numbers are added, it is possible we will equal or exceed the number of cases filed in 2005, when a significant number of people filed before the BAPCPA amendments (and means test) became effective. 

Click here for 2009 filings by chapter and division.

2010 will no doubt be a record year for filings as more people feel the effects of the economy, and exhaust their savings.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Yesterday, Friday December 4, 2009, three more Georgia Banks failed.  This makes a total of 24 failed banks in Georgia for 2009, and 29 failures since August 2008.  The latest victims are:

1.  Buckhead Community Bank was seized and sold by the FDIC to State Bank & Trust.

2.  First Security National Bank of Norcross was also sold to State Bank & Trust.

3.  Tattnall Bank of Reidsville was sold to HeritageBank of the South.

The Atlanta Business Chronicle has an article on State Bank & Trust's acquisitions and discusses the closure of Buckhead Community Bank:

 

 

Buckhead Community was founded in 1998 with $34 million in assets by investors including Loudermilk, an Atlanta business legend, and featured some of the city’s business elite on its board, including and real estate developers David Allman, owner of Regent Partners LLC, and Julian LeCraw.

It’s failure brings to mind the Sept. 25 collapse of Georgian Bank, another homegrown lender featuring a who’s who of board members and wealthy investors, and a plan to supply capital-hungry developers in a white-hot real estate market.

Like Georgian, Buckhead Community was heavily weighted in real estate development loans that soured with the fallout of the real estate market.

The bank tripled in size every three years from 1998 to 2007, propelled in part by an ultimately crippling decision in 2007 to acquire Allied Bancshares Inc., the parent company of First National Bank of Forsyth County.

 

 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Several  Chapter 11 cases were filed in the Northern District of Georgia in November and December 2009, through foreclosure day in December.  Rachel Tobin Ramos has an article in the Atlanta Journal Constitution about the Chapter 11 filing of local retail chain Limetree. 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.