Georgia Bankruptcy Blog

Georgia Bankruptcy Blog

Georgia Bankruptcy Judge Paul Bonapfel Lowers Boom On Chapter 7 Trustee and Counsel Fees

In what certainly will be one of most important and talked-about orders to come out of the Northern District of Georgia in some time, Judge Paul Bonapfel eviscerated a fee application filed by a Chapter 7 Trustee and counsel.  The case is In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019).  The local panel trustees and their attorneys are very concerned about the impact of the case, and other Bankruptcy judges in the district have already referenced the Order in other hearings.  The Orders discussed below strongly indicate that the issues have been brewing among the local judges for some time.  The Trustee has appealed the Order to the District Court (Case No. 1:21-cv-00304-AT (N.D. Ga)) and the United States Trustee and perhaps the National Association of Bankruptcy Trustees are expected to appear.   It is important to read the full, very detailed opinions – the initial twenty-four page Order and Notice (click here for .pdf) and the seventy-three page Final Order (click for .pdf or the Westlaw link).  Otherwise, here is a not-so-brief summary:

The Debtor filed a Chapter 7 case in October 2019 and scheduled ownership of his residence at a value of $117,962.00 and secured debt totaling $105,566.00.  Debtor claimed an exemption for the equity in the amount of $12,126.00.  His schedules reflected net monthly income of $2,988.00 and expenses in the same amount.  The Trustee believed, based on sources regularly used by trustees, the property could be worth $215,000.00, and the Debtor testified at the creditor meeting that he really did not know the true value.  Based on these facts, the Trustee filed an application to employ a real estate agent to market and sell the property.  In turn, the Debtor filed a motion to convert the case to Chapter 13 to retain his interest and equity in the residence.  It is important to note going forward that the parties and Judge apparently assumed that there was significant equity in the property and unsecured creditors, totaling less than $20,000.00, would be paid in full in either a Chapter 7 or confirmed Chapter 13 plan.

The Trustee objected to the Debtor’s motion to convert to Chapter 13 on three primary grounds: 1) a Chapter 13 would not be feasible because Debtor had no net monthly income to fund a plan according to his schedules, 2) conversion would not be in the best interests of creditors, and 3) the motion was filed in bad faith because Debtor undervalued the property in his schedules and could not propose a feasible Chapter 13 plan.  The Trustee also argued that creditors would be prejudiced by the delay in getting paid.  The Court ultimately granted the Debtor’s motion and converted the case to a Chapter 13, noting that debtors often make adjustments to their budgets to make plan payments and there was no real evidence of bad faith.  If Debtor could not propose a confirmable plan that paid all unsecured creditors in full, based on the equity in the property, the case would likely be re-converted back to Chapter 7 and the Trustee could sell the property.  (The Debtor’s Chapter 13 was ultimately confirmed in November 2020).

The Trustee filed an Applications for compensation for himself, as Trustee, and his law firm as counsel for the Trustee.  The Trustee requested compensation of $1,915.00 based on his hourly fee and 30 cents of expenses.  He also requested $13,304.00 in fees and $210.50 in expenses for his law firm as counsel for the Trustee.  No objections to the Application were filed.  Judge Bonapfel specifically pointed out in the Order and Notice discussed below that “[n]either the United States Trustee (whose duties include supervising Chapter 7 trustees and reviewing applications for compensation, 28 U.S.C. §586(a)(1), (3)), nor the debtor (who must bear the burden of payment of allowed fees given the value of nonexempt in this case) objected.

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Why Are Large Chapter 11 Cases Dismissed, Leaving Small Creditors Out of Luck? Judge Bonapfel Explains.

“It has been said that, in many bankruptcy cases, there are no good alternatives, only less bad ones. As financial realities in this case took hold, it became clear that, for most creditors, including the objectors, there were not even “less bad” alternatives. The Court is saddened that it can offer only an explanation for what happened and why.”  Judge Paul Bonapfel.

National fast food chain The Krystal Company (and several related entities) filed Chapter 11 Bankruptcy petitions on January 19, 2020 in the Northern District of Georgia.  It was ultimately determined that the largest secured creditor, Wells Fargo, had a secured claim of $51 million and it was secured by a lien on virtually all of the Debtor’s assets.  The Debtor, Creditors Committee and Wells Fargo agreed that the best way to pay creditors was to sell the Debtor’s assets as a going concern.  After significant marketing efforts and failed proposals, the parties proposed a sale of the Debtor’s assets to DB KRST Investors, LLC, a sub-agent for Wells Fargo. The consideration paid for the Debtor’s assets included:

(1) reduction of the amount of the Wells Fargo debt by $ 27 million (leaving an unpaid claim of about $ 24 million); (2) assumption by DB KRST Investors of postpetition debts incurred in the ordinary course of business, including attorneys and other professionals employed by the Debtor and the Committee for their work in the case; (3) assumption of liabilities under certain leases and other agreements; and (4) use of cash to pay expenses necessary to pay postpetition obligations the Debtor had incurred during the case and to “wind down” the chapter 11 case.

Notably, there was essentially no money left for general unsecured creditors after the sale.  After resolving some other matters in the case the Debtor filed a Motion to Dismiss the Chapter 11 case because there were no remaining assets and nothing more to do that could lead to payments to creditors.  After notice of the Motion to all creditors the Court received several objections to the dismissal.  Most were from individuals or small businesses who experienced hardship from the loss of their claim:

One person has lost the ability to feed poor people and help a high school student attend college because gift cards and a scholarship that the Debtor is obligated to provide under the terms of a settlement agreement for wrongful termination of employment will not be honored. Another individual has not been paid for services rendered in good faith in December 2019, right before the bankruptcy filing. A small business has lost about $ 18,700 for services rendered and expenses incurred that will not be paid. A customer injured at a Krystal restaurant has not received compensation for his injuries. Four workers who were laid off due to the Coronavirus pandemic are struggling to make ends meet for their families and have had difficulty receiving unemployment compensation. There are a lot of other people and companies with valid debts that the Debtor has not paid, and it is likely that many of them are suffering similar financial hardship…

Another creditor believed that failing to require the Debtor to pay it’s debts was a form of corporate welfare:

… Krystal [should] be required to pay its debts to us for this project. There has been too much corporate welfare in this country this summer to the gross detriment of small businesses and the American people. Krystal should not be a part of that – their marketing team and other high pay level execs still have jobs, their restaurants are still open. They should not be released from their moral and legal responsibilities when they still have the means to pay the debts to the small businesses who have worked hard and spent their own money for them. The small businesses who make this country what it is and without whom there would be no large corporations.

Judge Bonapfel discussed, in layman’s terms, why the case was dismissed without making the company pay creditors. Continue Reading

Small Business Reorganization After Covid-19 Pandemic: Better and Cheaper Options

In a recent article the New York Times, citing a poll, rather pessimistically stated that more than 40% of the small businesses in the country could close permanently in the next six months because of the coronavirus pandemic. Hopefully this not come to pass as the economy is opened up and we are able to control further outbreaks of Covid-19.  For small businesses that are able to struggle through and survive the pandemic, some relief may be available through the Small Business Reorganization Act of 2019  (also known as “Subchapter 5”) that became effective for cases filed in February 2020.  The cost of Chapter 11 has always been an impediment for small businesses seeking to reorganize.  Many of the same requirements for large commercial cases also applied to small businesses and Bankruptcy lawyers typically have to get an upfront retainer to protect them for the first few months of the case. This alone leads many businesses to continue struggling or close entirely.  The new procedures will probably save many small businesses needing to reorganize.

The first question is what “small businesses” qualify for the new procedures.  The primary qualification is the level of current debt.  Initially, the debt limit for Subchapter 5 was total debt (secured and unsecured) of $2,725,625.00 but it was raised to $7.5 million under the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act).  Although the initial limit was a significant amount,  consider a small business in metro Atlanta that may have an SBA Loan, a multi-year lease, equipment and inventory loans and other trade debt.  It would be relatively easy for even a “small” local business to exceed the initial limit.

There are several potential benefits for small businesses in the new Chapter 11, Subchapter 5, including:

  • A case trustee is appointed to monitor the case and, hopefully, assist the business and creditors in reaching a workable plan of reorganization and keeping the case on track.  Unlike in larger Chapter 11 proceedings the trustee does not take over the operations of the company.  In addition, there is no creditors committee. Although a committee may provide beneficial oversight in larger cases it is often an unnecessary burden in smaller cases and it can be very expensive.
  • A plan of reorganization must be filed within 90 days and the term must be between three and five years.  Recent cases indicate that the 90 day deadline can be extended for cause.  For example, an extension may be warranted as the pandemic continues and it is difficult for the business to forecast  income and expenses in the short term.  The business does not have to file a separate disclosure statement.  The new rules also make it easier to get the plan confirmed even with objecting creditors.
  • There are no United States Trustee fees.
  • The owners of the business can retain their ownership and, therefore, do not need to meet the “absolute priority rule.”
  • If the business makes all plan payments it receives a discharge of remaining debt.

With the favorable changes discussed above many small business should be able to survive through the pandemic and reorganize their debts.

 

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Chapter 11 cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.  

 

Bankruptcy and Reorganization for Small Businesses After Covid-19.

If you own a small business you are most likely very concerned about making it through the next few months.  Unfortunately, one of the inevitable consequences of the ongoing Covid-19 crisis is the increase in business closings – temporarily or permanently.  We have already seen a long list of large, well-known businesses close permanently or file Chapter 11 Bankruptcy petitions.  That list will get longer every day.  We also expect to get a large number of small and mid-sized businesses who have to file for Chapter 11 in the coming months.  Landlords may start to lose patience over past-due rent, courts open back up for evictions, and other creditors generally lose patience as they face their own financial issues.

The New York Times recently published an article about the small business bankruptcies that are expected to be filed.   The article gave particular attention to the “Small Business Restructuring Act” that, very fortuitously, became effective in February of this year.  The intent of the new law, also known as “Subchapter 5 Bankruptcy,” is to reduce the normally high costs of reorganization proceedings for small businesses.  Initially, the debt limit for qualifying for the new Subchapter 5 was $2.72 million but Congress raised the debt limit to $7.5 million as part of the recent stimulus programs.  This new debt limit significantly increases the number of small business that will qualify for, and benefit from, Subchapter 5.

If you have a small or mid-size business facing financial difficulties there are a few steps you can take now to prepare for a possible reorganization.  The most important first step is to speak with a good business bankruptcy and reorganization lawyer in your area.  Most lawyers will be glad to speak with you and meet with you, when appropriate, at no initial cost.  It is important to make sure you speak with lawyers who have significant experience in business bankruptcy and reorganization cases rather than lawyers who my gravitate to the practice due to the crisis.  The lawyers who advertise “no money down” cases on television may do a fine job with personal bankruptcies, but they typically do not handle business cases.

One of the first questions a lawyer usually asks is for a brief summary of your current debts so it is often helpful to start gathering this information.  This includes the general amount and status of secured debt, such as bank or real estate loans, lease obligations, unsecured loans and credit card debt, and trade debt owed to key suppliers.  This is also a good time to note any business debts that have been personally guaranteed by the owner.

What you should not do is wait until a real emergency, such as an eviction suit, getting cut off by a key supplier or getting behind on employee wages and taxes.  Contacting a lawyer sooner than later is by no means a guarantee that a small business will survive but the chances are much greater by planning as well in advance as possible.

 

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Chapter 11 cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com For more information, click here.  

 

Can Debtor’s Counsel Also Represent A Non-Filing Spouse (Or Other Party) In A Rule 2004 Examination? Maybe.

conflict of interestThis is an issue that comes up fairly often, although normally no objections are made for a Rule 2004 examination.  As long as the lawyer is not obstructive, it is usually not worth the additional time and expense of filing an objection.  In In re Craig, Ch. 7 Case No. 16-59582, 2017 WL 713572 (Bankr. N.D. Ga. February 21, 2017) (click here for .pdf), Judge Diehl addressed the issue of whether a debtor’s attorney can represent an non-filing spouse in a Rule 2004 exam.  The United States Trustee was the party moving for the examination in this case as part of their investigation into possible bad faith or whether an objection to discharge is appropriate.  The U.S. Trustee moved for disqualification of the debtor’s counsel after he informed them that he would be representing the debtor’s spouse at the examination, but before the examination took place.

The U.S. Trustee contends that Debtor and his non-filing spouse have divergent and conflicting interests relating to their marital property, and by representing both, [counsel] would be violating conflict of interest ethics rules, warranting disqualification. At the hearing, the U.S. Trustee provided numerous examples of potential conflicts that may arise but failed to allege any actual, current conflicts.

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N.D. Ga. – Judge Sacca Holds Interest Rate Paid Pursuant To 11 U.S.C. §726(a)(5) Is Federal Judgment Rate.

interest-rates-1It is the rare Chapter 7 case that ends up with sufficient estate assets to pay all claims in full, plus interest as required by 11 U.S.C. §726(a)(5).  The question addressed by Judge Sacca in In re Robinson, Ch. 7 Case No. 15-51556, 2017 WL 713571 (Bankr. N.D. Ga. February 22, 2017) (click here for .pdf) concerned the interest rate to be paid pursuant to this statute.

The issue before the Court is what does “interest at the legal rate” mean under Section 726(a)(5) of the Bankruptcy Code for purposes of a distribution on unsecured claims in a Chapter 7 case if the estate has sufficient assets to pay post-petition interest on those claims. Does the phrase mean interest at the federal judgment rate or does it mean the applicable nonbankruptcy rate on the unsecured claim that existed prepetition?

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11th Circuit Addresses Split Of Authority: Oral Statement Respecting Single Asset Falls Within Scope Of §523(a)(2)(A) Rather Than §523(a)(2)(A)

financial statementIn In re Appling (Appling v. Lamar, Archer & Cofrin, LLP), No. 16-11911, 2017 WL 603833 (11th Cir. February 15, 2017) (click here for .pdf), the Court addressed a question that has divided several other courts – Can a statement about a single asset be a “statement respecting the debtor’s … financial condition” for purposes of 11 U.S.C. §523(a)(2)?  In other words, if a debtor makes an oral material misrepresentation about a single asset (or liability?) that affects his overall financial condition, does it fall within the fraud exception of §523(a)(2)(A) or does it fall within the scope of §523(a)(2)(B), which requires that such statements be in writing in order to be excepted from discharge?  If the latter, arguably, it would allow dishonest debtors a “safe harbor” even after making significant material misrepresentations.

The debtor falsely stated to the creditor law firm that he expected a large tax refund of around $100,000 that he would use to pay the debt to the firm of approximately $61,000.  In reliance on this representation, the creditor continued its representation of the debtor and incurred more fees and expenses.  In fact, the tax refund was only about $60,000 and the debtor spent that money on his business rather than paying the creditor as he had promised.  After the creditor obtained a judgment against the debtor for ~$104,000, the debtor filed a Bankruptcy case.  The creditor filed an adversary proceeding to have the debt declared nondischargeable based upon the debtor’s fraud pursuant to §523(a)(2).  The Bankruptcy and District Courts held that the debt was excepted from discharge pursuant to §523(a)(2)(A).

The bankruptcy court ruled that because Appling made fraudulent statements on which Lamar justifiably relied, Appling’s debt to Lamar was nondischargeable, 11 U.S.C. § 523(a)(2)(A). The district court affirmed. The district court rejected Appling’s argument that his oral statements “respect[ed] … [his] financial condition,” 11 U.S.C. § 523(a)(2)(B), and should have been dischargeable. The district court ruled that “statements respecting the debtor’s financial condition involve the debtor’s net worth, overall financial health, or equation of assets and liabilities. A statement pertaining to a single asset is not a statement of financial condition.” The district court agreed with the bankruptcy court that Appling made material false statements with the intent to deceive on which Lamar justifiably relied.

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Judge Basier: Debtor May Redeem Real Property Sold At Tax Sale And Pay Redemption Amount Over Term Of Chapter 13 Plan.

tax saleIn In re Jimerson, Ch. 13 Case No. 16-60838, 2017 WL 393675 (Bankr. N.D. Ga. January 26, 2017 (Basier, J.) (click here for .pdf of opinion), the debtor’s property had been sold at a tax sale for non-payment of Fulton County property taxes.  The purchaser at the tax sale sent the appropriate Barment Notice providing that the debtor had until June 27, 2016 to redeem the property pursuant to O.C.G.A. §44-4-40. On June 20, 2016, Debtor filed a Chapter 13 case and a Chapter 13 plan, in which he proposed to redeem the property and pay the redemption amount (then $22,045.75) over the term of the plan.  The purchaser objected to confirmation of the plan.

The two (2) issues before the Court regarding the confirmation of the Plan both relate to the right of redemption that the Debtor seeks to exercise in his Plan. They are (1) whether the Debtor, having been transferred an interest in the Property after the tax sale and after the delivery of the Barment Notice, has a right of redemption under Georgia law and, if so, (2) whether the Debtor can pay the Redemption Amount over the term of his Plan.

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Fourth Circuit: Debtors Entitled To Full National And Local Standard Amount Of Expenses If They Incur An Expense In That Category.

MeansTest_BelowOur neighbors to the north recently had a key, debtor-friendly, decision in a Chapter 7 case regarding what expenses may be used in the means test calculations.  In In re Jackson, 2017 WL 59011, Ch. 7 No. 16-1358 (4th Cir., January 5, 2017) the debtors had used the entire amount allowed by the “National and Local Standards” for certain expenses even though their actual expenses for those categories were lower.  The Bankruptcy Administrator moved to dismiss.

We granted the appeal as to the following question: whether 11 U.S.C. § 707(b)(2) permits a debtor to take the full National and Local Standard amounts for expenses even though the debtor incurs actual expenses that are less than the standard amounts.

In their means test calculations, the debtors included the full local standard amount of $1548.00 for their home loan payments, even though their actual monthly payment was only $878.00.  They also claimed the entire local standard amount for vehicles of $488.00 each, even though the actual payments for their two vehicles was $111.00 and $90.50, respectively.  In her Motion, the Bankruptcy Administrator argued that this was “abuse” and that the official forms were incorrect because they should state that debtors are “limited to” the National and Local Standards.  The debtors argued that the statute was unambiguous and allowed them to use the entire amount of the National and Local Standards even if their actual expenses for those categories was lower. Continue Reading