Georgia Bankruptcy Blog

Georgia Bankruptcy Blog

US Trustee Investigating Possible Scheme to Take Debtors’ Equity in Real Property in Multiple Cases; Lawyer Sanctioned

In a very detailed 91-page Order entered in the Northern District of Georgia- and adopted by all Judges in the District – Judge Sacca addressed serious concerns of the United States Trustee over the handling of a Chapter 13 case by the Debtor’s lawyer. The United States Trustee is also investigating several other cases with similar fact patterns, and it appears that multiple debtors in this District have potentially lost well over $1 million in equity in their homes. The case is In re Day, Ch. 13 Case No. 23-52197-jrs, 2024 WL 1506791 (Bankr. N.D. Ga., entered April 5, 2024) (click here for .pdf). I will attempt to summarize the lengthy order and the fact pattern that appears in several other cases the US Trustee has identified so far, but one really should read the Order to understand the scope of the issues that will likely be investigated beyond Bankruptcy Court.

The Debtor is an 80-year widower who worked as a union iron worker for 41 years before retiring. His physical and mental health are declining, he is still recovering from a heart attack, and he is still grieving the loss of his wife in December 2021. He requires assistance from his family for his daily needs. His residence was titled solely in his wife’s name and it was encumbered by a 2009 reverse mortgage. The death of his wife triggered a default in the reverse mortgage and a foreclosure was scheduled for December 2022. The Debtor was overwhelmed with mail and phone calls that typically arise from foreclosure advertisements.

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Terms of Confirmed Chapter 11 Plan Prohibit Malpractice Claim Against Debtor’s Counsel

The Third Circuit Court of Appeals issues a reminder to debtors’ counsel that they can protect themselves with beneficial (boilerplate) terms in a Chapter 11 Plan. In In re SC SJ Holdings, LLC, 2024 WL 1328233 (3rd. Cir. March 28, 2024), the Debtor was the owner of a hotel that was operated by Accor Management US, Inc. pursuant to a Hotel Management Agreement (“HMA”). After COVID related problems servicing its debt, Debtor consulted Law Firm for advice. Law Firm advised Debtor it should file a Chapter 11 petition and terminate the HMA with Accor, and it could emerge from the case in 100 days. Instead, the case lasted eight months and Debtor had to pay Accor more than $20 million in breach damages for rejecting the HMA. Debtor subsequently requested relief from certain terms of the confirmed Plan in order to pursue a malpractice claim against the Law Firm for the faulty advice.

The Plan contained provisions “for mutual releases among numerous parties as to any claims arising out of or related to the bankruptcy proceedings or to Debtors. Those release provisions cover Debtors’ ‘Related Persons,’ defined to include their ‘attorneys … and other professionals.‘”

More than six months after confirmation and three months after the Plan had been substantially consummated, Debtor filed its motion to modify the plan. The District Court held that the Debtor had not complied with §1127, which provides that a debtor may modify a plan at any time after confirmation and before substantial consummation, and §1144, which provides that a party may seek revocation of a confirmation order within six months after entry of the order “if an only if such order was procured by fraud.” Debtor could not satisfy the express requirements of either of the Code sections, the District Court found. The Third Circuit affirmed.

The lesson to Bankruptcy lawyers – review your boilerplate plan language and amend as appropriate.

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for over 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.

Bankruptcy and Divorce (Vol. 73) – Agreements to Transfer Property

An entire blog could be devoted to the intersection of Bankruptcy and divorce, but for this post we will look at what happens when a divorce decree (or final settlement agreement) requires that one of the spouses transfer his or her interest in real property to the other spouse, but before the actual transfer is executed and recorded in the county real estate records one of the (now former) spouses files a Bankruptcy petition. I have had two recent cases in which this scenario came up. Keep in mind, this is a cautionary example rather than a detailed treatise.

As an example, assume that Husband and Wife are co-owners of the marital residence, and the Decree requires that the Husband transfer his one-half, undivided interest in the property to the Wife within “xx days” of the date of the entry of the Decree. However, before the Husband transfers his interest and a deed is recorded, he files a Chapter 7 Bankruptcy case. The Trustee, in the position of bona fide purchaser for value, without notice of the Wife’s interest in the property via the Decree, takes priority. If there is sufficient equity in the property, the Trustee will probably sell it for the benefit of creditors or settle with the Wife for the estate’s interest in the equity. In our example, if the property is sold, the Wife would be paid the proceeds for her one-half interest and half of the proceeds would be property of the estate. If the Husband was the sole owner of the residence before the Bankruptcy was filed, the estate may get all the proceeds and the Wife could lose what she believed was solely her home.

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Section 523(a) Exceptions to Discharge Do Not Apply to Subchapter V Corporate Debtors

… at least in Judge Sigler’s Court in the Northern District of Georgia. Primary Investments Group, Inc. v. RA Custom Design Inc., 2024 WL 607716, Adv. Proc. No. 23-05193-sms (February 13, 2024). The holding is consistent with most courts that have ruled on the issue, with the exception of the Fourth Circuit Court of Appeals in In re Cleary Packaging, LLC, 36 F.4th 509 (4th Cir. 2022).

This Court agrees with fellow bankruptcy courts and the Ninth Circuit Bankruptcy Appellate Panel that § 1192 does not make § 523(a) exceptions to discharge applicable to corporate entities. While the Court appreciates the Fourth Circuit’s analysis of the plain language of § 1192, the Court agrees with a notable commentator that the 4th Circuit’s conclusion does not necessarily follow from the language of § 1192. Moreover, the Court does not read § 1192(2)’s reference to § 523(a) to eliminate the restriction inherent in §523(a) that it only applies to individuals.

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for over 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.

The Discharge Injunction – Violations and Damages

It seems like violations of the discharge injunction get much less publicity than violations of the automatic stay.  Perhaps that is because by the time a discharge is entered the creditor has received the message.  When there is a violation the Eleventh Circuit has a good body of law on the issue and I happen to have a stack of these opinions due to a pending case.

When a Bankruptcy petition is filed it operates as a stay of virtually all efforts to collect a debt from a debtor or obtain possession or control over property of a debtor. A party may violate the stay even without the intent of doing so and actions taken in violation of the stay are usually void.  In a typical individual case, the automatic stay expires with the entry of an Order of Discharge.  Pursuant to 11 U.S.C. §524, the Discharge Order acts as an injunction against actions to collect a discharged debt.

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Obituary of Judge Walter Homer Drake, Jr.

The Honorable Walter Homer Drake, Jr.
November 21, 1932 – December 9, 2022.

Retired United States Bankruptcy Judge Walter Homer Drake, Jr., 90, passed away Friday, December 9, 2022 at his home in Newnan. He was born November 21, 1932 in Colquitt, Georgia to the late Walter Homer Drake and Mary Lois Cowart Drake. In addition to his parents, he was preceded in death by his beloved wife, Ruth Bridges Drake, and brother, Dr. Henry C. Drake.Judge Drake moved to Newnan when he was eight years old when his father became the Superintendent of Schools. He was the Valedictorian of the 1950 graduating class of Newnan High School. Judge Drake was a graduate of Mercer University Undergraduate and Law School, 1954 A.B. and 1956 LL.B. After graduating law school, he enrolled in the U.S. Army where he served as an officer in the Judge Advocate General’s Corps from 1956 to 1959. After his military service, he practiced law for several years before being appointed as United States Bankruptcy Judge in 1964 for the Northern District of Georgia. He served as Chief Judge from 1968 to 1976. Judge Drake left the bench in 1976 to become a partner in the law firm of Swift, Currie, McGhee & Hiers. In 1979, he felt the calling to return to the bench and desired to spend more time with his family, so he resumed his career as a bankruptcy judge for the Northern District of Georgia until his retirement in 2021. Judge Drake was the longest serving bankruptcy judge in United States history and one of the longest serving federal judges.

Judge Drake’s love of his alma mater was evident in his commitment of service to Mercer University. He served on the Mercer University Board of Trustees from 2009-2011 and received the designation of Life Trustee in 2013. Judge Drake received the Mercer University Outstanding Alumnus Award in 2017 and the Outstanding Alumnus Award from the Mercer Law School in 2003. Mercer recognized his commitment to the University in 2012 by naming the Athletic Field House for Homer and Ruth Drake.

Judge Drake and his family have been longtime members of Central Baptist Church where he served several terms as a Deacon and he was an Adult Sunday School Teacher for over thirty years. At the time of his death, he was a member of the Myrtle Arnal Mann Sunday School Class.

The funeral is 1:00 pm Wednesday, December 14, 2022 at Central Baptist Church, 14 West Broad Street, Newnan, GA with Rev. Matt Sapp and Dr. Joel Richardson officiating. Following the funeral, the family will greet friends in the church fellowship hall. A private family interment will be at Forest Lawn Memorial Park. Rather than flowers, the family respectfully requests memorial contributions to Mercer on Mission, 1501 Mercer University Drive, Macon, GA 31207 or https://www.mercer.edu/give/

Condolences may be expressed online at www.mckoon.com

Survivors include sons, Walter H. Drake, III (Tracie), Taylor Bridges Drake (Lori), and grandchildren, Harrison, Wesley, Wheeler, Ella Catherine, Taylor, Jr., and Henry.

The Trap of Merchant Cash Advances and Financing

If you have a business, you have no doubt received advertisements for “merchant cash advances,” “merchant loans” or “merchant financing,” whether or not those specific terms are used.  If in doubt, just do a search for those terms and you will get a couple pages of sponsored ads (but be warned the big brother of the internet will flood you with ads after that).  Based on cases I have now, and calls I have received, business has picked up considerably for those lenders post-covid.  Although you might be tempted by the relatively easy cash promised as soon as the next business day, you might fall into a trap you cannot easily escape.

Initially, let’s review the setup. You find “ABC Finance” online, through a google search or an advertisement, promising your company immediate financing and a quick, easy approval process.  ABC asks you for basic information about your business, and a list of your accounts receivable, including the names of your customers, and you complete the short online application.  Great news! Your financing is approved and all you need to do is sign the documents, provide your bank account information, and your money will be wired the next day!

Now let’s review the actual deal, using a real world example from my files for a business that has $100,000.00 in receivables (click the images for a larger version).  The main document you sign is titled a “Purchase Agreement” and you have agreed to sell that $100,000.00 of receivables to ABC for a purchase price of $75,000.00, which they will wire to you.  However, in reality, it is not a sale because you have agreed to pay ABC back the $100,000.00 (not the $75,000.00), plus a long list of various fees.  In this example, you agree to pay ABC $639.20 per day through automatic drafts from your business bank account.  If all goes well, you repay the “loan” in 7-8 months, with an effective annual interest rate of 75-100%.  As you get close to the payoff date, ABC will probably be happy to make a new deal for the same receivables or give you more money.  After all, they have almost doubled their money already.

If you are not able to make those daily payments — every single business day — the situation can go downhill very quickly.  At best, if you make up those “bounced” payments they will come with hefty fees from ABC and your bank for every daily payment missed.  If you cannot make these payments up, ABC might drain your bank account because you gave them a security interest in your accounts and perhaps other business property.  More importantly, you will review your files and realize that not only did you sign a personal guaranty for the “loan” you also signed a consent judgment or “confession of judgment.”  That means that ABC can get a judgment against you personally and your company for the loan balance and hefty legal fees merely by filing the consent judgment with the court (often a New York court).  You have lost a lawsuit in a distant court even before you know you have been sued.  In some cases ABC might even contact your credit card merchant and all of the customers you told them about and threaten them with legal action if they do not send the receivables to ABC, effectively shutting down your business.  In a flash, your personal and business finances are in shambles.

Even if the merchant debt is your only significant debt (which is not uncommon) it can kill your business if you just go through a slow period or your bank account balance just happens to be low for a few days.  You should consider carefully the real cost of this financing and the consequences described above before you enter into this relationship.  If you are already in this situation, contact a qualified lawyer to discuss how it may be resolved and your business saved.

Scott Riddle’s practice focuses on bankruptcy and reorganization for businesses and business owners. Scott has represented businesses and other parties in Bankruptcy and reorganization cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.

 

In Case of First Impression 11th Circuit Holds Debt of PACA Trustee Not Excepted From Discharge Pursuant to 11 U.S.C. §523(a)(4).

In a case of first impression in the Eleventh Circuit, the Circuit Panel addressed the dischargeability of debts incurred by a produce buyer who is acting as a trustee under the Perishable Agricultural Commodities Act (“PACA”).  In re Forrest, 2022 WL 3908803 (11th Cir. August 31, 2022)(click here for .pdf).   The court concluded that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge pursuant to 11 U.S.C. §523(a)(4), which excepts debts “for fraud or defalcation while acting in a fiduciary capacity…”

The basic, undisputed facts are:

The Forrests [Debtors] are owners and officers of Central Market of FL, Inc. (Central Market), which buys and sells produce. [Spring Valley Produce, Inc. (“SVP”)] sold $261,504.15 worth of produce to Central Market for which Central Market never paid. During the transactions at issue, SVP and Central Market were licensed under PACA. SVP preserved its right as a PACA trust beneficiary by including the required statutory statement on its invoices to Central Market. Upon receiving and accepting SVP’s produce shipments, Central Market became a PACA trustee of a trust res consisting of that produce… On May 15, 2020, the Forrests filed a Chapter 7 bankruptcy petition hoping to discharge their business debts, including the debt owed to SVP. On August 14, 2020, SVP commenced this adversary proceeding, seeking a declaration that the debt is nondischargeable under § 523(a)(4). That statute excepts from discharge debts “for fraud or defalcation  while acting in a fiduciary capacity[.]”

The Panel noted that the “Fiduciary Capacity Exception” had existed since 1841, and reviewed U.S. Supreme Court cases on the Exception.

These early Supreme Court cases thus give us the following rules. First, the Fiduciary Capacity Exception does not apply to trusts implied by contract but applies to technical trusts or trusts in the technical sense. [Chapman v. Forsyth, 43 U.S. (2 How.) 202, 208, 11 L.Ed. 236 (1844)]. Second, the debtor must be acting in a fiduciary capacity before the act of defalcation creating the debt for the exception to apply. [Upshur v. Briscoe, 138 U.S. 365, 378, 375, 11 S.Ct. 313, 34 L.Ed. 931 (1891)]. Third, the substance of the transaction, rather than its form, controls in determining whether a transaction fits the “strict and narrow” definition of a technical trust. [Davis v. Aetna Acceptance Co., 293 U.S. 328, 333-34, 55 S.Ct. 151, 79 L.Ed. 393 (1934)].

The Panel next addressed the core issue of “what type of trust-like duties are sufficient to create a technical trust under the Fiduciary Capacity Exception,” stating that “[o]ur precedent has generally emphasized two duties: the duty to segregate trust assets and the duty to refrain from using trust-assets for non-trust purposes.”  After reviewing case law, the court created the following test:

But synthesizing all of these cases, we hold that the following test applies in determining whether a debtor is acting in a “fiduciary capacity” under § 523(a)(4). First, the fiduciary relationship must have (1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. This tracks the traditional and narrow definition of trusts in early Supreme Court cases as well as our own approach and the approach taken by bankruptcy courts in this Circuit. Second, the fiduciary relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust. Based on our caselaw, the two most important trust-like duties, and the ones that we have held create a technical trust, are the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.

(emphasis added). Getting to the facts of this case, the Panel held that PACA creates a trustee, identifiable beneficiaries and an identifiable trust res, and thus the first requirement is met.  However, PACA does not meet the second requirement of imposing “trust like duties.”  There is no requirement the trust assets be segregated, or not used for non-trust purposes.  There is a requirement of keeping accurate records, but while a “typical “trust like duty” that alone is insufficient to create a technical trust.  A PACA Trust is closer to a “constructive” or “resulting” trust.

The Panel, therefore, concluded that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge pursuant to 11 U.S.C. §523(a)(4).

Image: SBR (Market in Barcelona, Spain).

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.

 

 

New Chapter 11 Filing Alert – Governors Gun Club Kennesaw, LLC

The Governors Gun Club of Kennesaw  filed a Chapter 11 case in the Northern District of Georgia on August 17, 2022. Case No. 22-20787-jrs. The reason for the filing, as stated in pleadings filed with the Court –

Like so many other small businesses, the Debtor suffered a series of setbacks at the hands of the pandemic. Debtor is a membership based business that offers its members a luxury experience for indoor shooting facilities, including an indoor shooting range, professional firearms training, concerts, and a situational training simulator. Debtor also offers packages for corporate and social events at its club.

The Debtor has identified South State Bank as the primary secured lender, with a balance owed of $8,619,776.00.  The Bank has security interest in the Debtor’s real property and primary place of business, 1005 Cobb Place Blvd. NW, Kennesaw, Georgia 30144.  The property is co-owned by Web IV, LLC, which also filed its own Chapter 11 case on August 17, 2022. Case No. 22-20790-jrs.

 

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.

In a Case of First Impression, 11th Circuit Rules “New Value” Can Be Both Preference Defense and Administrative Claim

In Auriga Polymers, Inc. v. PMCM2, LLC, as Liquidating Trustee, No. 20-14647, 2022 WL 2800195 (11th Cir. July 17, 2022) (click here for .pdf) the creditor, Auriga, received transfers of more than $2.2 million in the 90 days before the Debtor, Beaulieu Group, LLC, filed its Bankruptcy case on July 16, 2017.  During the 90 day preference period, Auriga had also delivered to the Debtor over $3.523 million of goods, with at least $694,502.00 of the goods delivered within 20 days of the Petition Date.

Auriga filed two claims in the case: 1) a general unsecured claim in the amount of $3.596 million, and 2) an administrative claim in the amount of $694,502.00 pursuant to §503(b)(9) of the Bankruptcy Code for the value of the goods delivered within 20 days of the Petition Date.  After confirmation of the Debtor’s Plan, which gave authority to the Liquidating Trust to pursue avoidance actions, the Liquidating Trustee filed a proceeding against Auriga to avoid and recover the $2.2 million Pre-Petition Transfers under §547(b), to reclassify any portion of Auriga’s § 503(b)(9) request that was included as part of its new value defense as a general unsecured claim, and to disallow any claims by Auriga until it disgorged any amounts successfully avoided by Trustee. Auriga counterclaimed seeking a declaratory judgment that (1) its use of the new value defense under § 547(c)(4) does not preclude it from using the same value to recover under § 503(b)(9), and (2) the Trustee cannot use 11 U.S.C. § 502(d) to disallow Auriga’s § 503(b)(9) request for administrative expense treatment.

Auriga and the Trustee subsequently stipulated that the payments made to Auriga in the preference period were avoidable preferences, and the new value defense protected all but $421,119.00 of the preferential transfers.  “That $421,119 in value conveyed by Auriga to Beaulieu was part of Auriga’s $694,502 § 503(b)(9) request; the parties dispute Auriga’s ability to also use that $421,119 value as part of its § 547(c)(4) new value defense. The parties agreed, however, that Auriga had an allowed § 503(b)(9) claim for $273,382 (the difference between the total request for $694,502 and the $421,119 disputed portion).”

On summary judgment, the Bankruptcy Court entered an Order that, inter alia, held that “funds held in reserve to pay § 503(b)(9) claims are ‘otherwise unavoidable’ transfers for purposes of a § 547(c)(4) defense and cannot be used to offset preference liability. Click here for .pdf; see also In re Beaulieu Grp., LLC (“Fabric Sources”), 616 B.R. 857 (Bankr. N.D. Ga. 2020) (wherein the Bankruptcy Court previously ruled on this issue). In other words, using the same “value” as both an administrative claim and a new value defense was, in essence, a double recovery for the creditor.

Auriga appealed to the District Court, which stayed the case for immediate direct appeal to the Eleventh Circuit.

The precise question warranting direct appeal is:

whether a Liquidation Trustee’s post-petition reservation of funds sufficient to pay a defendant’s administrative expense claim under § 503(b)(9) amounts to an “otherwise unavoidable transfer” within the meaning of § 547(c)(4) such that it precludes the use of such new value as part of the defendant’s affirmative defense of subsequent new value under § 547(c)(4) of the Bankruptcy Code.

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