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.

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")...

 

  THIRTY-SIXTH ANNUAL SEMINAR
March 18-20, 2010

Early Registration Deadline: February 10, 2010
ONLY A FEW DAYS TO SAVE $70!

The InterContinental Buckhead Hotel
ATLANTA, GEORGIA 

ATTENTION GEORGIA LAWYERS!

Are you short of hours in 2009?

The SBLI this year is prior to the March 31 deadline to complete your 2009 CLE without penalty.

Attend the SBLI and fulfill all 2009 CLE hours, including trial, ethics and professionalism.

2010 Sponsors

Visit our website for additional details: www.sbli-inc.org

Questions: 770-451-4448 or info@sbli-inc.org

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.

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.

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.

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.

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.

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.

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.

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.

At the hearing, Sun Trust's only witness was Joel Crisler, an appraiser. Crisler stated that in his expert opinion the fair market value of the Property was $ 460,000.00, a value which is based upon a future value of $ 1,197,800.00 with a five year holding period at a discount rate of twenty percent. Debtor's first witness, Johnnie Ganem, who is also an appraiser but did not conduct an independent appraisal of the Property, testified that in his opinion a three year holding period and a twelve percent discount rate were more appropriate valuation parameters. Adapting Crisler's appraisal with these changes, Ganem testified the value of the Property would yield a value of between $ 750,000.00 to $ 800,000.00. Debtor's second witness, Derek Pommerenck, a principal of Debtor, testified in his opinion the property was worth $ 1,200,000.00...

After considering the expert testimony of appraisers for both parties, I conclude that SunTrust did not carry its  burden as of the date of the hearing. SunTrust's expert established a value of $ 460,000.00 utilizing what he believed the value of the property would be in five years and discounting it to present day value at twenty percent per year. Debtor's expert believed that a three year holding period with a discount rate in the range of twelve to thirteen percent was more appropriate and concluded to a value in the range of $ 750,000.00 to $ 800,000.00. I am unable to conclude what the proper discount rate would be after hearing the testimony of these two appraisers, but assuming a five year holding period at a lower discount rate of twelve percent, the value of the property today would exceed $ 600,000.00. Similarly, a shorter three year holding period at a twenty percent discount rate would yield a value of roughly $ 675,000.00. Without reaching a precise conclusion as to what the value of the property is, however, I am able to conclude, given a pre-petition SunTrust   debt totaling approximately $ 550,000.00, that there remains some equity in this property. As a result, the burden is not carried under § 362(d)(1), and I move on to the consideration of the Motion based on 11 U.S.C. § 362(d)(3)...

SunTrust's motion requests that this Court determine that the Property securing its claim is "single asset real estate." Unless I so find, SunTrust can not rely on § 362(d)(3) but only § 362(d)(1) and (2), which would impose the burden of establishing that there is no equity in the property to obtain relief, a burden that SunTrust cannot meet as described above. See 11 U.S.C. § 362(g).

There is no doubt that the property meets the definition. It constitutes a single project and is not residential, Debtor is not a family farmer, and no business is being conducted on the property. See Statement of Financial Affairs, Dckt.No. 8, pgs. 14 & 19. Therefore, the Property qualifies as a "single asset real estate."

However, Debtor argues that (d)(3) does not apply because it has a counterclaim against Portrait Homes in Superior Court, which "is clearly not real property nor is it an attachment or appurtenance to the property." Brief, Dckt.No. 71, pg. 6. This fact does not change this Court's finding.Go to the description of this Headnote.The focus of the definition is not whether the case involves a "single asset" but rather whether the stay applies to "single asset real estate" held by a bankruptcy estate.

 Having concluded that there is, at the present time, some equity in this property, although slight equity, I hold that while it is mandatory that I grant stay relief under § 362(d)(3), it is not mandatory that I grant unconditional relief from stay. Instead, I am permitted under that section to condition or modify the stay in accordance with the evidence.

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.

The Court lifted the stay based on judicial economy, the existence of other defendants, and the need for a jury trial against the non-debtor defendants.

Debtor's argument as to prejudice--e.g., the expense of litigation--is somewhat negated by its argument that Debtor has failed to state a claim. If Debtor is correct that Mr. Ellerbee's complaint lacks substance, the district court can dispense with it efficiently, with respect to time, money, and other resources, on a Rule 12(b)(6) motion. Consequently, any prejudice to Debtor is minimal.

On the other hand, at least two factors weigh heavily in Mr. Ellerbee's favor: judicial economy and the existence of other defendants. Even assuming Mr. Ellerbee waived any right he has to a jury trial against Debtor due to his participation in the bankruptcy proceedings, he is entitled to a jury trial against the non-debtor defendants, who also retain jury trial rights. This point is particularly significant as it relates to DT Carson. Because DT Carson and Debtor were joint employers of Mr. Ellerbee, the cases against them are likely to revolve around similar--if not identical--issues and evidence. If the Court grants stay relief, Mr. Ellerbee will have to prosecute what amounts to the same case in two different forums, with the possibility of inconsistent results. "[P]rinciples of judicial economy require that, without good reason, judicial resources should not be spent by duplicitous litigation, and that a lawsuit should only be tried once, if one forum with jurisdiction over all parties involved is available to fully dispose of all issues relating to the lawsuit..."

 

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.

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.