Georgia Bankruptcy Blog

In a case that will likely be much more relevant to Chapter 13 cases, rather than Chapter 7 cases (where creditors are far less interested in repossessing household goods), Judge Bonapfel has ruled that a store credit card issuer's claim must be treated as secured in the Debtor's Chapter 13 plan. 

In In re Wages, 2009 Bankr. LEXIS 4325 (Bankr. N.D. Ga. Dec. 21, 2009), the Debtor had applied for a credit card at Best Buy.  The Application, signed by the Debtor, stated the following:

"You grant us a purchase money security interest in the goods purchased on your Account." 4 Section 3 of the Application also states that use of the credit card constitutes agreement to the terms and conditions of a "Cardholder Agreement and Disclosure Statement" (the "Cardholder Agreement") that would be sent with the credit card. Paragraph 5 of the "Important Terms" set forth in the Cardholder Agreement states in pertinent part, "[Y]ou grant us a purchase money security interest in the goods purchased with your Card."

Debtor made several purchases on the account, each time signing a sales slip.  The Debtors' Chapter 13 plan proposed to pay HSBC Bank Nevada, N.A. as an unsecured claim.

The Debtors contend that HSBC does not have an enforceable security interest under O.C.G.A. § 11-9-203. Under § 11-9-203(b)(3)(A), the creation of a valid security interest requires, among other things, the debtor's authentication of "a security agreement that provides a description of the collateral." A description of personal property "is sufficient, whether or not it is specific, if it reasonably identifies what is described," O.C.G.A. § 11-9-108(a), but a description only by type of collateral is an insufficient description of consumer goods in a consumer transaction. O.C.G.A. § 11-9-108(e)(2). The basic requirement is that the description must make possible the identification of the collateral described.

The Court, however, disagreed that the creditor had not met these requirements.

Georgia law does not require that a single document contain all of the requisites of a security agreement… Here, both the Application and the Cardholder Agreement that it incorporates, coupled with Mr. Wages' use of the credit account, establish the existence of a security agreement in which he agreed that HSBC would retain a security interest in goods he might later purchase on that account. When he purchased the goods and thereby acquired rights in them, HSBC retained a security interest in them pursuant to the earlier security agreement. O.C.G.A. § 11-9-203(b)(2). The sales slips that evidenced transactions on the account show the purchased items that serve as collateral, and Mr. Wages has not challenged the adequacy of those descriptions.

The Court therefore concludes that HSBC has a valid and enforceable security interest in the goods Mr. Wages purchased on the account… The Chapter 13 plan proposed by the Debtors in this case contemplates treatment of HSBC's claim as unsecured. As such, it cannot be confirmed. The Debtors shall have 20 days from the date of entry of this Order to file and serve a modification to their plan, or to propose a new plan, that deals with the claim of HSBC as a secured claim.

In re Stevens, 2010 Bankr. LEXIS 463 (Bankr. N.D. Ga. Jan. 28, 2010) (Bonapfel).  The United States Trustee filed a Motion to Dismiss the Chapter 7 case on the grounds that the Debtor had not provided a copy of his tax return within 7 days before the first meeting of creditors, and Debtor testified at the meeting that he had not filed a return for 15 years.   The parties submitted a consent order dismissing the case, but Judge Bonapfel declined to enter the order or dismiss the case.

11 U.S.C. § 521(e)(2)(A)(i) provides that the Debtor shall provide not later than 7 days before the date first set for the first meeting of creditors, to the trustee a copy of the Federal income tax return required under applicable law (or at the election of the debtor, a transcript of such return) for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed. If the debtor fails to comply with this requirement, the next subparagraph provides that the court "shall dismiss the case unless the debtor demonstrates that the failure to comply is due to circumstances beyond the control of the debtor." 11 U.S.C. § 521(e)(2)(B).

The Motion's request for dismissal under these provisions is problematic because it does not clearly articulate the basis for dismissal. The Motion appears to assume that, because the Debtor was required to file federal tax returns for recent years, § 521(e)(2)(A)(i) requires the debtor to produce a tax return for a recent year. This is not what the statute says. Rather, it states that the debtor must produce the return for the most recent tax year that was filed. Nothing requires that the Debtor file a tax return...

Admittedly, the Debtor here has provided no explanation for the absence of his most recent tax return (whatever year that is), so he has arguably failed to carry the burden that § 521(e)(2)(B) expressly places on him. One could reasonably expect that a debtor seeking to avoid dismissal should advise the United States Trustee and the Court of the last tax return that he filed. Because the Debtor has not done so on the record before the Court, the Court could possibly grant the Motion on technical pleading grounds.

The Court declines to reach such an absurd result on the undisputed facts that the present record reflects. Had the Debtor stated, "The last tax return I filed was around 1993 and I no longer have it," the Court would conclude without hesitation (no other evidence being presented) that the passage of 15 years from the date of filing of the return established cause for not producing it. And absent something else in the record, that is exactly what the Court thinks the Debtor meant in his declaration... And the Court does wonder what relevance the debtor's 1993 tax return could possibly have to his current financial situation.
 

 The U.S. Trustee also sought dismissal under § 707(a), contending that the Debtor failed to submit necessary documents, and the trustee is not required to speculate about or reconstruct the Debtor's financial history.

(after the jump...)

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")...

 

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.

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.

On December 1, 2009, several amendments to the Federal Rules of Bankruptcy Procedure will take effect.  You can see the Public Notice by clicking here. Please note that several time periods are shortened under the new Rules.  A summary of the Rules is available here, and new forms are available here.

New Local Rules for the Northern District of Georgia will also be in effect on December 1, 2009.  You can see the redline version of the changes by clicking here.

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.

Foreclosure Day in Georgia was yesterday, November 4, 2009.  Below are the Chapter 11 cases filed over the last few weeks.

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.

Triad Senior Living communities filed several related Chapter 11 cases in the Newnan Division of the Northern District of Georgia. 

Spa Sydell, the well-known day spa in Atlanta, filed a Chapter 11 bankruptcy petition in Atlanta on September 3, 2009.  In re Sydell, Inc., Ch. 11 Case No. 09-83407-crm (click here to download 117 page petition).  Not only is Spa Sydell in business at all locations, it has plans to open a seventh location in Roswell. 

The AJC has posted an article by Rachel Ramos and David Markiewicz. 

In its 117-page bankruptcy petition, the company listed $4.3 million in debts and $5 million in assets. The filing shows a decline in gross income to $16.2 million in 2008 from $19.1 million in 2007. In 2009, year-to-date sales were $9.3 million through May. Atlanta bankruptcy attorney Scott Riddle said spending on luxury items such as spa treatments has fallen in the recession...

The bankruptcy filing lists $2.25 million in unsecured debt. Of that, $743,000 is owed on leases for the six retail locations. Hundreds of unsecured creditors are listed, mostly for trade debt, from radio station and newspaper advertising to business cards, shipping and catering. The only secured creditor listed is BB&T, with a $1.8 million loan. The company also owes the Georgia Department of Revenue more than $200,000.

As I noted to Rachel, spending on "luxury" items are down in this economy as people have to tighten their belts to make house payments or rent.  A trip to the day spa could be two weeks of groceries for the family.   If we project Spa Sydell's 2009 income (noting that the petition states the $9.3 million income is through the petition date, not May), and compare it with 2008, income is down about 24%.  That is a significant amount for a retailer, and could lead to a significant rise in debt, as reflected in the petition.

However, Chapter 11 provides the Spa with an opportunity to save a significant amount of money by rejecting, or terminating, leases that are unfavorable.  It is likely that Spy Sydell, like many other businesses, leased commercial space at a time when rates were much higher than they are today.  In some instances, the same space next door might be leasing for half of what a debtor is currently paying for its three or four year old lease.  The Bankruptcy Code allows a debtor to reject these bad leases and either move to another space, or to negotiate a much lower rate with the current landlord, who no doubt  will not want to have empty space. 

The savings on leases for a debtor with several locations could alone be enough for a debtor to successfully reorganize. 

One bright spot for Spa Sydell is that spending on personal grooming is actually rising, according to studies in the Wall Street Journal Wallet Blog:

As car sales have plummeted, shopping online has climbed 8.6% in the last 12 months. More people are spending on gym memberships (up 6.7%), bar drinks (up 5.8%) and sports and hobbies (up 4.7%). Dining at full-service restaurants is up 3.1%, and personal care — haircuts, massages and manicures — is up 2.5%.

“I think people are looking for comfort in small things,” says Melinda Crump, a spokesperson for Sageworks. “You may not be able to take a vacation in Tahiti or Hawaii, but you can join a gym.”

 

 

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.

It was not a particularly heavy month of Chapter 11 filings, through foreclosure day this week, but there were still several new Chapter 11 filings in the last month.

The downward spiral of real estate appears to have taken another developer into Chapter 11.

Lake Burton Development, LLC, owned by Killearn, and the developer of Waterfall Country Club and Waterfall at Lake Burton, filed a Chapter 11 petition in the Northern District of Georgia on July 10, 2009. Case No. 09-22830-reb.  The company was recently identified as owing significant past-due taxes in Clayton County.

As Banks are getting much more strict about their lending, they are refusing to grant permanent loans or renew construction or development loans, especially where the loan-to-value ratio has changed significantly.  I've met with several builders and developers in recent months, and they consistently say that lenders are either not working with them at all, or demanding a paydown of the loan to get the ratio in line with their guidelines. Since homes are not selling, and often builders are competing with foreclosed properties next door, the options are often to close down or try Chapter 11. 

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

Brown Steel, LLC and Case Engineered Lumber, Inc. have filed Chapter 11 petitions in the Northern District of Georgia.

From the Deal Watch Blog -

Brown Steel, based in Newnan, manufactures and fabricates structural and plate steel for commercial and industrial customers. G. Frank Nason IV of Lamberth, Cifelli, Stokes, Ellis & Nason represents the company, which in its petition, filed in U.S. Bankruptcy Court for the Northern District of Georgia, estimates that it has between $1 million and $10 million in both assets and liabilities.

This reorganization is not Brown Steel’s first debt-fueled trip to court. Colonial Bank of Alabama, represented by Kevin B. Getzendanner of Arnall Golden & Gregory, sued the company in Coweta Superior Court on June 11. According to the complaint, which seeks a receiver and injunctive relief, Brown Steel defaulted on more than $5.6 million in loans from the bank. [click here for Newnan Times-Herald article about suit] ...

The other reorganization petition filed in the Northern District by Flowery Branch, Ga.-based Case Engineered Lumber, lists assets of less than $50,000 and between $10 million and $50 million in liabilities. Barbara Ellis-Munro of Ellenberg, Ogier, Rothschild & Rosenfeld represents the company, which supplies engineered floor and roof systems to homebuilders and lumber dealers.

 

Silverton Financial Services, Inc., formerly known as The Bankers Bank,  filed a Chapter 7 petition in the Northern District of Georgia on June 5, 2009.  The Bank was closed by the FDIC on May 1, 2009.  The case number is 09-74623-jem. 

Jeffrey K. Kerr, CPA was appointed as Chapter 7 Trustee to liquidate the assets of the company.

The FDIC had just decided to liquidate the assets prior to the filing.   From a June 6, 2009 Wall Street Journal article -

The Federal Deposit Insurance Corp. has decided to wind down Silverton Bank, the failed Atlanta "bankers' bank," instead of selling it to investors, a setback for the private-equity industry but not one expected to damp its hunger for troubled banks.

A consortium that included Carlyle Group LLC submitted a bid for the lender two weeks ago. "The bid underwent an evaluation and negotiation process by the FDIC," the agency said in a letter sent to Silverton's customers late Thursday. "Regrettably, an equitable offer could not be agreed upon by all parties."

In addition to Carlyle, the potential investor group included private-equity investors Lightyear Capital LLC, Harvest Partners LLC and Colony Capital LLC...

In re Taylor, 2009 Bankr LEXIS, 09-63210-PWB (March 25, 2009).  The creditor sought dismissal pursuant to § 521(i)(2) because the debtor failed to file pay advices.  Debtor was self-employed, so the Court observed that the pay advice requirement was not applicable because the debtor had no pay advices "from any employer."  Judge Bonepfel scheduled a hearing to determine whether the debtor has to file pay advices, or whether the Court could excuse failure to file in the 45 day time limit.  What the Order does not say is what is required to be filed if the debtor has no pay advices?  Is there an unwritten requirement that the debtor file a certification or affidavit? 

In re Dabney, 2009 Bankr. LEXIS 1112, 08-77955-PWB (April 7, 2009).  The Chapter 13 Trustee objected to the debtor's attorney's flat fee of $3500 where the debtor was only paying unsecured, non-priority claims in his confirmed Ch. 13 plan.  Judge Bonapfel engaged in a lengthy 6 page analysis of fees in Chapter 13 cases (which all Ch. 13 lawyers should probably read).   The lawyer based the flat fee on the average spent on all cases.  The Court could not conclude that the fee was reasonable in this case, allowed the $1500 previously approved, and allowed the lawyer to file another fee application. 

In re Kelly, 2009 Bankr. LEXIS 902, 08-85727-MHM (March 25, 2009).  Debtor's unopposed motion to require Child Support Services to return drivers license was granted, where debtor testified that he was a commercial truck driver, and his Ch. 13 plan cured the support arrearage in a reasonable time.  Pursuant to Section 105 of the Code, the Court had the authority, even though the suspension of the license was not subject to the automatic stay.

In re Hamilton, 2009 Bankr. LEXIS, 793, 07-68258-MHM).  Debtor moved to reopen her Chapter 7 case to file a complaint to determine the dischargeability of her student loan debts.  The motion was denied because debtor did not show grounds to discharge her student loan, and she could pursue the matter in another court in the absence of exclusive jurisdiction.

In re Cavalli, 2009 Bankr. LEXIS 819, Adv. No. 08-6338, Case No. 08-63340-MHM (March 19, 2009).  Plaintiff, the debtor's former spouse, filed a motion for summary judgment arguing that the debtor's obligations in a settlement agreement entered in the divorce action were nondischargeable.  Under that agreement, debtor was to refinance or sell the marital home and pay other debts.  Debtor argued the obligations were not "support" under section 523(a)(5), but did not address section 523(a)(15).  The Court held that all obligations, support and property division, were nondischargeable.  Rule 9011 sanctions against the debtor were to be addressed in subsequent pleadings.

From the Middle District -

In re Morris, 2009 Bankr. LEXIS 1181, 07-70114-JTL (April 21, 2009).  Upon the dismissal of a Chapter 13 case, after the confirmation of a plan, the Chapter 13 Trustee distributed undistributed funds to creditors pursuant to the plan rather than return them to the debtor.

Chapter 11 filings were up leading up to foreclosure day yesterday.  In other posts, I discussed filings by Caraustar and related entities, and MPI/Highlands apartments. In all, over 50 Chapter 11 cases were filed in the Northern District over the last month.

Here are the other Chapter 11 cases filed since early May 2009.