In Nordberg v. Sanchez (In re Chase & Sanborn Corp.), 813 F.2d 1177, 1181 (11th Cir. 1987), which involved fraudulent transfers, we discussed “[t]he rules established in the avoidable preference cases” and explained that “any funds under the control of the debtor, regardless of the source, are properly deemed to be the debtor’s property, and any transfers that diminish that property are subject to avoidance.” ...

On appeal, BOA argues that the Bankruptcy Court erred because the transfer was a bank to bank transfer that was a mere substitution of creditors and was not an avoidable preference. BOA asserts that the funds from the other credit card companies were not controlled by Egidi and were not the property of Egidi, the debtor. This argument fails.The evidence established that Egidi directed other credit   card companies to  pay MBNA and had control of the lines of credit from other credit card companies. There is no evidence that any credit card company decided to direct the funds to MBNA on its own accord or specifically instructed Egidi to pay MBNA with the funds...

BOA argues that the funds were not in the control of the debtor because they were never in Egidi’s bank account. This argument must also fail. The inquiry is whether Egidi controlled the disposition of the funds, not whether she mechanically made the payment to MBNA. That the “possession [by Egidi] took place electronically rather than mechanically (through deposit slips and checks) is of no moment.” ...

BOA also argues that the transfer was not an avoidable preference because it  did not diminish the funds available to the other creditors. According to BOA, the funds belonged to the other credit card companies and had the funds not been transferred, they would have remained the property of the other credit card companies...  Egidi’s transfer of funds to MBNA, instead of other creditors, deprived her  creditors of “an equal distribution of the . . . assets” and constituted a voidable preference. Once the credit card companies extended the lines of credit to Egidi, she could have paid  other creditors or purchased other assets that would have become part of the estate and been available to other creditors. Because Egidi  chose to pay MBNA from the  lines of credit, the other creditors were denied payment or an opportunity for payment. ...

More after the break --

BOA attempts to seek refuge in the earmarking exception, but that doctrine provides no shelter. Other courts have recognized an exception to section 547(b) when the property is “earmarked.” ... This exception exists “primarily because the assets from the third party were never in the control of the debtor and therefore payment of these assets to a creditor in no way diminishes the debtor’s estate.”  This Court has not expressly applied the earmarking doctrine in the past, and we decline to do so today. .. Because Egidi, not the lender, designated the recipient of the transferred funds, the earmarking doctrine is inapplicable and additional discussion is not warranted...

BOA also attempts to cloud the issue by calling the transfer a “bank to bank transfer” and argues that the transfers were mere “substit[utions of] one creditor for another” which did not diminish the estate. This argument is only applicable when the new lender directs the payments and “[t]he money was never available to satisfy the claims of general creditors.”...

BOA lastly argues that the transfers were really a “debt swap,” which cannot be avoided by the Trustee, pursuant to 11 U.S.C. § 546(g). This argument was not raised before the Bankruptcy Court and was mentioned in a single sentence in the conclusion section of BOA’s brief to the District Court.

Community Bank of West Georgia, based in Villa Rica, was seized.  No buyer was found, so the bank will be closed.  Click here for the article in the Atlanta Business Chronicle. 

Neighborhood Community Bank of Newnan was also seized.  CharterBank has assumed the assets and deposits.  Click here to read more. 

The tally of closed Georgia banks is now at 14 for the last nine months. According to this article by Joe Rauch of the Atlanta Business Chronicle, we may see many more.

“They’re ramping up a little bit,” said Chip MacDonald, Atlanta-based Jones Day banking attorney. “With their efforts to staff up, raise money for the deposit insurance fund through the special assessments and the Treasury, I expect they’ll try to resolve these faster throughout the remainder of the year.”

The national deposit insurer, which backstops accounts to avoid customers pulling their money from a bank and hastening its demise, previously avoided seizing two banks in the same metro area during this crisis...

“This is a perpetuation of what we’ve been talking about for a while now,” said Brian Olasov, an Atlanta-based managing director at McKenna, Long & Aldridge LLP, who noted Georgia banks have an imbalance between fewer customer, or core, deposits and more outstanding loans.

“The numbers indicate Georgia banks got way out over their skis. This was a great place to lend in the boom, but now they’re paying the price,” Olasov says...

Georgia’s failure woes began in earnest in August 2008, when Alpharetta-based Integrity Bank, once the state’s fastest growing bank, collapsed under the weight of highly speculative real estate loans, concentrated amongst a small group of borrowers.

Cornerstone filed for Chapter 11 protection in 2008 and is beginning to liquidate assets. Meanwhile, the state has launched an investigation into the company...

After the denomination closed the program in 1996, the ministers who ran it, the Rev. Cecil Brooks and the Rev. John Ottinger, took the organization public and called it Cornerstone.

The examiner’s report says they raised money through bond sales and loans, and they lent the money to churches from various denominations. The company morphed into financing general developments under “a tangled web of non-profit and for-profit corporations and limited liability companies,” where the ministers made “substantial income over and above the salaries disclosed in the … filings with the U.S. Securities and Exchange Commission,” the report says.

John A. Thomson Jr., Ottinger’s attorney, said the report is full of “incorrect” conclusions “based on only half the truth or taking certain facts out of the context of Cornerstone’s investment transactions.”  Thomson noted in a written response to The Atlanta Journal-Constitution that Ottinger and his family lost $1.4 million in Cornerstone investments...

Court documents show the company knew it had $128 million in “significant credit risks” months before filing for bankruptcy. More than 3,600 investors held $142 million in bonds. The examiner’s report by Marietta attorney Pat Huddleston characterizes Brooks and Ottinger as “self-dealing” in their business transactions while they touted the company’s spiritual mission. It says company letterhead in 2000 read, “Using God’s money for God’s Kingdom.” Huddleston wrote, “It is difficult to conclude that Cornerstone had any interest in financing churches between 1999 and 2006.”  Huddleston defended his report by phone, saying it is based on sworn testimony and company documents.

The examiner’s report says they raised money through bond sales and loans, and they lent the money to churches from various denominations. The company morphed into financing general developments under “a tangled web of non-profit and for-profit corporations and limited liability companies,” where the ministers made “substantial income over and above the salaries disclosed in the … filings with the U.S. Securities and Exchange Commission,” the report says.  In one instance, the two made more than $6 million each by selling one corporation’s holdings to another.

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.

 

From the Atlanta Business Chronicle:

Last October, Southern Community announced it had overhauled operations and raised capital in an attempt to survive, after receiving a cease and desist order from the FDIC.   The bank changed management, replacing founding CEO Gary McGaha with Dave Coxon, and raised $2 million in additional capital from directors, to weather additional loan losses.

The bank reported a 28 percent spike in problem loans during the fourth quarter of 2008 -- the worst increase for the bank during the recent economic downturn.

By first quarter 2009, Southern Community reported a 39.4 percent problem loan ratio -- a comparison of delinquent loans, and foreclosed real estate to total loans -- one of the highest levels in the state.

On March 31, the bank reported $33 million in foreclosed real estate, but only $13 million in capital to absorb further loan losses.

The bank had a Texas ratio of 518 percent. The ratio is a measure of a bank’s nonperforming loans and foreclosed real estate, compared against the tangible common equity and loan loss reserves of the bank...

In Espinosa v. United Student Aid Funds, Inc.,  530 F.3d 895; 2008 U.S. App. LEXIS 13314 (9th Cir. June 24, 2008) (click here for .pdf file,  here for the subsequent opinion, and here for the third opinion), the issue was whether a debtor could discharge a portion of his student loan debt in his Chapter 13 plan where he provided notice of the deadline for objections and the confirmation hearing, but did not file an adversary proceeding under secion 523(a)(8).  

This is the nub of Funds’s argument: To satisfy its obligations under the Bankruptcy Code, a Chapter 13 debtor usually only has to notify creditors by mail of the deadline for filing objections and when the confirmation hearing will occur, Fed. R. Bankr. P. 2002(b), as Espinosa did here. However, student loans may be discharged under Chapter 13, 11 U.S.C. § 1328(a)(2), only if the debtor can show “undue hardship,” id. § 523(a)(8), and such a showing can only be made in an adversary proceeding, Fed. R. Bankr. P. 7001(6). To initiate an adversary proceeding, a debtor must file a complaint, id. 7003, which must be served on the creditor along with a summons, id. 7004. Espinosa didn’t commence an adversary proceeding and therefore did not obtain a judicial declaration of “undue hardship.” Absent such a declaration, Funds argues, the bankruptcy court lacked authority to discharge the student loan debt by means of the Chapter 13 plan. Funds’s motion for relief from the discharge order was based on the fact that Espinosa obtained his discharge without following the statutorily-prescribed procedures for discharging student loan debt.

The Court noted that its prior precedent dictated that the Court rule against the creditor:

 Funds argues that the confirmed bankruptcy plan is void, because Funds didn’t receive service of a complaint and summons and there was no adversary proceeding to establish “undue hardship,” which the Bankruptcy Code and Rules require as a condition for discharging a student loan debt. We rejected this argument in Pardee v. Great Lakes Higher Education Corp. (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999).

Relying on the Tenth Circuit’s opinion in Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253, 1258 (10th Cir. 1999), overruled by Educ. Credit Mgmt. Corp. v. Mersmann (In re Mersmann), 505 F.3d 1033, 1046-47 (10th Cir. 2007) (en banc), we held that “[i]f a creditor fails to protect its interests by timely objecting to a plan or appealing the confirmation order, ‘it cannot later complain about a certain provision contained in a confirmed plan, even if such a provision is inconsistent with the Code.’ ” Pardee, 193 F.3d at 1086. In reaching this conclusion, Pardee also relied on a long line of cases, from our circuit and elsewhere, that “recognized the finality of confirmation orders even if the confirmed bankruptcy plan contains illegal provisions.” Id...

Since Pardee, there have been significant developments in this area of the law: Two other circuits have rejected Pardee’s reasoning—significantly including the Tenth Circuit, which overruled its own Andersen opinion, on which Pardee principally relied. Mersmann, 505 F.3d at 1046-47; Whelton v. Educ. Credit Mgmt. Corp., 432 F.3d 150, 154 (2d Cir. 2005). Our own Bankruptcy Appellate Panel has questioned the reasoning of Pardee, albeit by a divided vote. Educ. Credit Mgmt. Corp. v. Repp (In re Repp), 307 B.R. 144, 148 n.3 (B.A.P. 9th Cir. 2004). And three circuits, as well as our Bankruptcy Appellate Panel, have held that the procedures employed here violate the creditor’s due process rights. Ruehle v. Educ. Credit Mgmt. Corp. (In re Ruehle), 412 F.3d 679, 684 (6th Cir. 2005); In re Hanson, 397 F.3d 482, 486 (7th Cir. 2005); Banks v. Sallie Mae Servicing Corp. (In re Banks), 299 F.3d 296, 302 (4th Cir. 2002); Repp, 307 B.R. at 154. It is thus fair to say that our position in Pardee is in the minority; indeed, among the circuits we now stand alone....

We have therefore taken a look at the cases from the other circuits and do not immediately find them persuasive; the rationale of Pardee and Andersen, relying as it does on straightforward notions of notice and waiver, seem far more consistent with accepted principles concerning the finality of judgments that transcend this particular corner of the law.

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 Campbell, 2009 Bankr. LEXIS 833, Ch. 11 Case No. 08-51832-JDW (Bankr. M.D. Ga. March 25, 2009).    Debtor owned a 50% interest in an LLC.  The LLC was indebted to the Bank for more than $5.1 million, secured by the LLC’s assets and Debtor’s assets, and Debtor personally guaranteed the debt.  The loan was in default.  The parties agreed that the total value of the Bank’s collateral, including LLC and Debtor’s assets, was more than the total debt.  However, the value of the Debtor’s property that served as collateral was worth less than the total debt.

The Bank sought relief from the automatic stay to repossess the Debtor’s Rolls Royce automobile, which was worth approximately $220-225,000.  Debtor objected to the motion on the grounds that he had equity in the vehicle if the Court considered the total value of the Bank’s collateral, including LLC property.

The Court granted the Bank’s motion and lifted the stay. 

The statute provides for stay relief if the debtor has no equity "in such property." 11 U.S.C. § 362(d)(2)(A). The phrase "such property" apparently refers property protected by the automatic stay, id. § 362(d), which includes property of the estate and property of the debtor but not property of non-debtors. See id. § 362(a). However, bankruptcy courts are divided on the proper interpretation of the statute. Compare In re Colonial Center, Inc., 156 B.R. 452, 461 (Bankr. E.D. Pa. 1993) ("The measurement of equity in section 362(d) ... should depend upon the circumstances and the purpose behind the valuation of property.") with In re New Era Co., 125 B.R. 725, 729 (S.D.N.Y. 1991) ("[S]ection 362(d)(2) only demands an analysis of the debtor's equity in property[.]").

The Court need not analyze the merits of the two positions at this time. There is no question Debtors must relinquish the Rolls Royce. Its value will either benefit the Bank or the unsecured creditors. Therefore, it is appropriate to allow stay relief for the limited purpose of selling the Rolls Royce. The proceeds of the sale shall be held by the Bank as property of the estate, which the Bank may not disburse until further order of the Court. Such further order will depend on a change in circumstances, such as liquidation of other collateral and the conclusion of additional litigation that affects the Bank's security. The Court will consider entering such further order upon application of any party in interest at such time as a change of circumstances should occur.

From the WSJ article -

The theme-park company, shouldering more than $2 billion in debt, had been racing to restructure outside of court, negotiating with lenders, selling parks and laying off staff. But it couldn't outrun the deteriorating economy and a looming $288 million payment due preferred shareholders this August, along with $31 million in unpaid dividends.

Six Flags, whose theme parks attract more than 25 million visitors a year, said it filed Chapter 11 with a prearranged reorganization plan that garnered unanimous approval from its lenders' steering committee. The plan would deleverage Six Flags' balance sheet by about $1.8 billion and eliminate more than $300 million in preferred stock obligations, the company said.

Low consumer confidence kept attendance down at Six Flags' 20 parks, which dot several cities across North America, including Chicago, San Antonio and Mexico City. Revenue fell and the company delayed certain debt payments.... A few months ago, Six Flags hired law firm Paul Hastings Janofsky & Walker LLP to prepare for a bankruptcy filing. It also hired Houlihan Lokey Howard & Zukin to negotiate with creditors.

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.

There were 7,514 commercial bankruptcy filings for the month, compared with just 5,354 during the same month a year ago, according to Automated Access to Court Electronic Records (AACER), a database of U.S. bankruptcy statistics used by attorneys and lenders. The figures do not include Chrysler, which filed for bankruptcy in April or General Motors, which filed on June 1...

Per day, 376 companies sought protection from creditors in bankruptcy court.

"The average filing amount per day is actually the highest since the bankruptcy law changed in October of 2005," said Mike Bickford, president of AACER.

The Deal Watch Blog also discusses a study that finds the increase in business filings will continue.

The number of corporate bankruptcies in the United States is projected to rise by 45 percent this year, with worldwide business insolvencies expected to increase by 35 percent, according to a new study published today. It’s a situation that the study’s sponsor, Paris-based credit insurer Euler Hermes, referred to as a “burial ground” for business.

The Euler Hermes International Insolvencies Outlook indeed paints a dark and gloomy picture of the future of global business, at least in the near term...

More than 43,500 U.S. companies declared bankruptcy in 2008, according to the study, second only to France, with 57,650, among the list of 29 countries examined by Euler Hermes and its chief researcher, Karine Berger.

• Wills

• Trusts

• Estate Planning

• Family Limited Partnerships

• Business Succession Planning

• Elder Care

• Probate Administration With a Will

• Probate Administration Without a Will

• Small Business Organization

Using a conservative definition, 62.1% of all bankruptcies in 2007 were medical; 92% of these medical debtors had medical debts over $5000, or 10% of pretax family income. The rest met criteria for medical bankruptcy because they had lost significant income due to illness or mortgaged a home to pay medical bills. Most medical debtors were well educated, owned homes, and had middle-class occupations. Three quarters had health insurance. Using identical definitions in 2001 and 2007, the share of bankruptcies attributable to medical problems rose by 49.6%. In logistic regression analysis controlling for demographic factors, the odds that a bankruptcy had a medical cause was 2.38-fold higher in 2007 than in 2001.

 

Click here for an article in the LA Times on the subject. It would be interesting to know how the findings would change for 2008-09 with the changes in the economy.

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

From the Atlanta Business Chronicle:

Caraustar (NASDAQ: CSAR) also reached agreement with debt holders to reduce the company's debt obligations by $135 million.

Under the Plan, holders of outstanding shares of Caraustar's common stock will receive their pro rata share of $2.9 million, or 10 cents a share, subject to certain conditions. The restructuring plan calls for the exchange of the company's existing 7.375 percent and 7.25 percent senior notes for an aggregate of $85 million in new senior secured notes and 100 percent of the common stock of the reorganized company.

Wayzata Investment Partners LLC will become the company's controlling shareholder.

In conjunction with the restructuring, Caraustar has landed a $75 million debtor-in-possession line of credit from General Electric Capital Corp. The money may be used for cash collateralizing outstanding letters of credit, paying for goods and services in the ordinary course of the business and general corporate purposes.

The debtor entities are:

 

 

Type
09-73830-mgd Caraustar Industries, Inc.	associated
09-73835-mgd Austell Holding Company, LLC	associated
09-73836-mgd Camden Paperboard Corporation	associated
09-73837-mgd Caraustar Custom Packaging Group, Inc.	associated
09-73839-mgd Caraustar Custom Packaging Group (Maryland), Inc.	associated
09-73840-mgd Caraustar, G.P.	associated
09-73841-mgd Caraustar Industrial and Consumer Products Group,	associated
09-73843-mgd Caraustar Mill Group, Inc.	associated
09-73844-mgd Caraustar Recovered Fiber Group, Inc.	associated
09-73845-mgd Chicago Paperboard Corporation	associated
09-73846-mgd Federal Transport, Inc.	associated
09-73847-mgd Gypsum MGC, Inc.	associated
09-73848-mgd Halifax Paper Board Company, Inc.	associated
09-73849-mgd McQueeney Gypsum Company	associated
09-73850-mgd Paragon Plastics, Inc.	associated
09-73851-mgd PBL Inc.	associated
09-73853-mgd McQueeney Gypsum Company, LLC	associated
09-73854-mgd Sprague Paperboard, Inc.	associated
09-73855-mgd RECCMG, LLC	associated

Associated Case