Sunday, March 11, 2018

How the Amici Came Together for the Fifth Circuit's Disappearing Exemptions Cases

When a case is heard at the Supreme Court, the docket is filled with briefs of amicus curiae trying to say something that will catch the court's attention.   With so many briefs filed, they sometimes cancel each other out in a flutter of pdf files sounding variations on the same themes.   However, amicus briefs are much less common at the Court of Appeals level.  Recently I was part of an effort where a panel of the Fifth Circuit reversed itself in one instance and reversed a district court in another.   The cases are Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017) and Lowe v. DeBerry (In re DeBerry), 2018 U.S. Appl LEXIS 5772 (5th Cir. 3/7/18).    In this post, I would like to share how our amicus briefs came together as well as some tips on amicus practice before the Fifth Circuit.

Tuesday, February 20, 2018

Fifth Circuit Report: 4th Quarter 2017

The fourth quarter of 2017 was another slow period for Fifth Circuit opinions dealing with bankruptcy.  There was only one published opinion and there were several opinions that I found on the Fifth Circuit's page but were not in LEXIS.  Nevertheless, here they are for your consideration.   The cases cover mootness, standing, and verbal statements about financial condition.
 
Dick v. Colo Hous. Enters., LLC, 872 F.3d 709 (5th Cir. 10/4/17)

Debtor sought to prevent a foreclosure sale including filing several bankruptcies.  Two years after the last bankruptcy was dismissed, the substitute trustee posted the property for foreclosure.   The Debtor obtained a TRO in state court.  The Defendants removed the case to federal court.  The U.S. District Judge denied the request for a preliminary injunction.   The Debtor appealed and requested a stay pending appeal in the Fifth Circuit.   The stay was requested the day before the foreclosure sale and was approved the next day.  However, by this time, the substitute trustee had already conducted the foreclosure sale and sold the property to the lender.

Monday, February 19, 2018

Fifth Circuit Report: Third Quarter 2017

The third quarter of 2017 had one blockbuster opinion reaffirming the finality of exemptions in Chapter 7 and several less remarkable decisions.   It was a slow quarter for bankruptcy.


Rosbottom v. Schiff (Matter of Rosbottom), 701 Fex. Appx. 330(5th Cir. 7/17/17)(unpublished)
The Debtor and his spouse conveyed their interests in a Louisiana residence to trusts.   They then sold the residence for $1,850,000 and each deposited half the money in their own account.   In 2005, Rosbottom divorced his spouse.  He purchased a condominium in Dallas using his share of the proceeds from the Louisiana residence.  He then conveyed the condo to his trust.   Rosbottom filed for bankruptcy in 2009.   He was convicted of bankruptcy fraud and a Chapter 11 trustee was appointed.   After the Trustee confirmed a plan, the Trustee and the ex-spouse brought a declaratory judgment action seeking to determine that the Dallas condo was property of the estate.

The Bankruptcy Court found that the trust created by Rosbottom was invalid under Louisiana law because it violated Louisiana law prohibiting the conveyance of an undivided interest in community property.    The Fifth Circuit affirmed.    Because the creation of the trust was a nullity under Louisiana law, it never gained title to the Louisiana property.  When that property was sold and a new residence was purchased, that property belonged to the Debtor and was property of the estate.

Saturday, November 04, 2017

Republican Tax Plan May Expand Dischargeability of Private Student Loan Debt

In an application of the law of unintended consequences, the Republican plan to eliminate the deduction for student loan interest may render private student loans subject to discharge in bankruptcy.  

In 2005, Congress amended 11 U.S.C. Sec. 507(8) to add the following category of non-dischargeable debts:
any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual

Sunday, October 15, 2017

NCBJ Report: Jevic--The Inside Story and the Impact on Future Chapter 11s

Jevic--The Inside Story and the Impact on Future Chapter 11s featured participants from the case offering their perspective on the case and what it meant.   Dan Dooley of MorrisAnderson was the Chief Restructuring Officer for Jevic.   Domenic Pacitti of Klehr Harrison was Debtor's counsel.   Rene Roupinan of Outten & Golden represented the WARN Act claimants.   The panel was moderated by Judge Gregg W. Zive (Bankr. D. Nev.).    

I have previously written about Jevic here.

Jevic Holding Company was a trucking company based in New Jersey.   It had been acquired by Sun Capital and was financed by CIT Group.    CIT requested that the debtor liquidate itself in Chapter 11.   The Debtor apparently gave WARN Act notices.   However, New Jersey had its own state statute which was stricter than the national statute.

When the case was filed, the CRO Dan Dooley, negotiated a wind-down budget which included $3.0 million for paying accrued wages and related payroll obligations.   After the company was liquidated, the Debtor was holding $1.7 million which was subject to Sun's lien (it was also a secured creditor).   There were two other important pieces of litigation.   The WARN Act claimants sued the Debtor and Sun Capital.  They alleged that the Debtor and Sun were a unitary employer.   The Official Committee of Unsecured Creditors sued Sun and CIT to unwind the leveraged buyout as a fraudulent transfer.     

Eventually a settlement was reached where Sun allowed the $1.7 million to be used to pay creditors and CIT paid another $2.0 million to cover priority and administrative claims.  However, in the settlement Sun did not want any money to go to the WARN Act claimants because they were also suing Sun.  As a result, a structured dismissal was set up which provided that the settlement funds would be paid to creditors but not to the WARN Act claimants.   This involved skipping over the WARN Act claimants' priority claims.   

The Bankruptcy Court approved the structured dismissal and the Third Circuit affirmed under the "rare circumstances" doctrine.   The Supreme Court reversed finding that a debtor could not violate the priority scheme under the Bankruptcy Code in a non-consensual an end of case distribution.  The Court left open the possibility that paying creditors out of sequence would be allowed in cases such as paying employee wage claims and critical vendor claims where doing so would advance Code-related goals.

Mr. Pacetti (the Debtor's lawyer) explained that they used a structured dismissal because there are only three ways to end a chapter 11 case--a plan, conversion or dismissal.  11 U.S.C. Sec. 349(b) says that the parties shall revert to the status quo ante unless the court "orders otherwise."  The structured dismissal was an attempt to have the court "order otherwise."    

Judge Zive focused on the Court's reference to allowing priorities to be skipped based on a Code-related objective.   He raised the case of Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2nd Cir. 2007).   In Iridium,  the debtor had claims against its parent, Motorola, and Motorola had administrative claims against the estate.    In settlement of other litigation, a fund of money was created to fund a litigation trust to sue Motorola.  Any money remaining in the litigation trust would go to the unsecured creditors.  Motorola objected to diverting funds which could have paid its administrative claim to the trust.   The Second Circuit generally found that the settlement was permissible because having a well-funded creditors' trust would increase the value of the claims against Motorola.  However, it remanded for an explanation of why the residual funds in the trust would go to the unsecured creditors instead of being distributed in priority order.

Mr. Dooley stated that the Code-related objective here was maximizing the pie.

Judge Zive said that other areas where priority-skipping would be allowed would be wage orders, critical vendor motions and roll-ups as part of DIP financing.   He said these are all orders that allow the case to proceed.   

Ms. Roupinan was asked how Jevic would change WARN Act litigation.   She said that requiring parties to follow the absolute priority rule would provide clarity and predictability and improved ability to negotiate.

Mr. Pacetti said that in skipping priorities, it was important to consider what the stage of the case is.  First day motions will get greater latitude than end of case distributions.  He also stressed the importance of making an evidentiary record.

Judge Zive seconded this notion stating that any time you want the court to do something you should provide sufficient facts.  He gave the example of routine motions for cash management and continuing bank accounts which could result in de facto sustantive consolidation.  

Ms. Roupinian asked whether priority-skipping would be ok if all parties consented.   She asked what would happen if the U.S. Trustee was the only party objecting.

Judge Zive replied that the policy of the U.S. Trustee is not the Bankruptcy Code.  He said that "if everyone is consenting, I don't have a problem with that."   However, he focused on what constituted consent?   He said that if a party is given notice and fails to object, they have waived their objection.

Mr. Dooley said that the take-away from the case was that it was really about the absolute priority rule, not structured dismissals.

Judge Zive said that one of the problems with Jevic was that there was no going concern value to protect and no jobs.  As a result, the Code-related objective was much weaker.   A few moments later, he emphasized that priority skipping can be allowed to protect going concern value, jobs, etc. but that "there has to be a significant reason."   

The panel also discussed gifting, that is, where one creditor gives up value so that it can go to a creditor with lesser priority.   Judge Zive pointed out In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015) where lenders acquired the debtor's asset via a credit bid but deposited funds in escrow for professional fees and paid some funds directly to unsecured creditors.   Where the funds were paid directly by the secured lender, they were never property of the estate and thus the court had no jurisdiction over them.  

Mr. Pacetti that lawyers should cut deals earlier in the case and read Jevic for what it says.   However, Ms. Roupinian said that parties should either follow the absolute priority rule or get consent.

Judge Zive said that courts would be skeptical about non-consensual priority-skipping and that lawyers should get the evidence that shows why the settlement is proper.

Mr. Dooley said that doing priority skipping "requires real proof."   He also said that structured dismissals must be squeaky clean and that first day orders may be more carefully examined.  He said that the ruling will embolden the U.S. Trustee.   

The take-aways from the panel were build your evidentiary record, identify a Code-related objective and do your deal at a time when it will still advance the reorganization.




 

NCBJ Report: Asset Protection Trusts--How to Make Them and How to Break Them



Asset Protection Trusts--How to Make Them and How to Break Them examined a phenomenon emerging in the laws of several states, including Nevada.   This panel was moderated by Ron Peterson of Jenner & Block with Neal Levin of Freeborn & Peters, Judith Greenstone Miller of Jaffe Raitt Heuer  Heuer & Weiss, P.C., Rebecca Hume of Kobre & Kim, and Judge Brian F. Kenney of the U.S. Bankruptcy Court for the Eastern District of Virginia.

According to Judith Greenstone Miller, there are now seventeen states that allow Debtor Asset Protection trusts ("DAPs").    Some states have a statute of limitations as short as eighteen months to challenge a DAP while others may allow up to four years or more for an existing creditor that did not have knowledge of the transfer.   Some states require an affidavit of solvency.

Michigan was the seventeenth state to allow DAPs in March 2017 and amended the Uniform Fraudulent Transfer Act (UFTA) to exempt a "qualified disposition."    There are also variations in state law between those following the Uniform Fraudulent Transactions Act (UVTA) and the Uniform Voidable Transfers Act.   While UFTA does not have a specific choice of law provision, UVTA does.

Ms. Miller explained that DAPs require giving up control and that high net worth indiiduals don't like to give up control.    DAPs are attractive to individuals with plenty of assets now who fear future liabilities such as doctors.

In Michigan, DAPs must be irrevocable.   The Trustee must reside in Michigan.   The settlor must execute an affidavit that the transfer of assets into the trust will not render them insolvent and that they are not subject to pending litigation other than as described.     They may retain the power to direct investments and request distributions of income and principal although they cannot demand a distribution.   The sole means to challenge a DAP is to bring an action under the UVTA by clear and convincing evidence.      The statute of limitations in Michigan is shortened from six years to two years, although it starts at the time of the qualified disposition.   If a claim arises after the disposition, the statute of limitations is two years from when the claim arises.   Beyond the state statute of limitations, the only resort is to Sec. 548 of the Bankruptcy Code for actual intent to hinder, delay or defraud.   If a transfer is set aside, the property reverts to the settlor and only to the extent necessary to satisfy the claim.  

Neal Levin described Nevada's DAP law, which he described as an "absolute shield" for assets.  It has been around since 1999 and has a two year statute of limitations with a six month discovery rule.  There is no requirement for an affidvait of solvency.   The burden of proof is clear and convincing evidence. Additionally, the settlor retains incredible control over the trust assets.   He said that the only exception to the Act's protections is an action under the UVTA.

Judge Brian F. Kenney described the Virginia law as being one of the least protective.  He said that his state statute says that a transfer is not voidable solely because is was made to a self-settled trust without consideration.   As with the law of several other states, Virginia's statute contains a provision shielding professionals who structure a transfer from liability.    However, at the same time, Virginia adopted a statute providing for sanctions against any party within its jurisdiction who transfers assets with knowledge of a judgment.   Thus, there is some conflict in the law.

Rebecca Hume came all the way from the Cayman Islands to discuss foreign asset protection trusts which she described as a war between the world and the debtor's assets with a gate that only the debtor has a key to.   She described the Cook Islands as the worst jurisdiction for creditors with the Island of Nevis close behind.   The law of the Cayman Islands provides that issues relating to Cayman Islands trusts must be governed by the law of the Cayman Islands and that any order of a foreign court attempting to assert control over a Cayman Islands trust would be unenforceable.   In the Cook Islands, a claim must be brought within two years of when the transfer was made.   The creditor must prove a fraud beyond a reasonable doubt.   Further, the creditor must hire a lawyer in the Cook Islands and may not enter into a contingent fee arrangements.   She said she knew of only one case where a Cook Islands Trust was set aside. 

Judge Kenney said that Sec. 548(e) was added to the Code to address the problem of DAPs.   He said that it allows a ten year lookback for a self settled trust and requires an intent to hinder, delay or defraud.    This standard relies on the traditional badges of fraud analysis.     The Trustee has two years to commence an action but that the statute could be equitably tolled.

Ron Peterson asked Judge Kenney what he could do to a debtor who was ordered to repatriate assets from a Cook Islands Trust but refused to do so.   He said that under Sec. 105(a), he has the power to enforce his orders.   He said that as a practical matter, incarceration for civil contempt will often be referred to the U.S. District Court because the District Court has more tools available to deal with incarceration.   In one case, a debtor named Sala raised the defense of impossibility but the Court ruled that where is the impossibility is self-created, the defense would be rejected.   He described it as a game of chicken between the debtor who is willing to sit in jail without giving up his funds and the Court that keeps him there.

In U.S. v. Grant, Neal Levin said that the settlor's widow raised the impossibility defense saying "I asked for the money back but they said no."   The Court found that this was not sufficient to purge the contempt. 

Mr. Levin pointed out that one-third of the world's wealth is kept in off-shore jurisdictions.    He said that it was important to work with professionals in the affected jurisdiction.  

Ms. Hume said that many offshore jurisdictions allow the settlor to retain great control over the trust and would only impose an independent trustee when "things get dicey."  She said that settlors frequently retain the policy to change the trustee.   She pointed to a court of appeals decision which required a settlor to disclose where trusts were located and what was within them.   She described a Privy Council decision where a settlor had a power to revoke the trust but refused to exercise that power.   The Council held that it could appoint a receiver over the power of revocation which allowed the trust to be revoked and the money collected.

Mr. Levin talked about how most wire transfers pass through New York banks.   Because these banks are in the United States, the U.S. Courts have jurisdiction over them and they can be brought into the case. 

Ron Peterson pointed out that the U.S. has treaties with countries such as Switzerland and that the U.S. Attorney can be brought to enforce the treaty in limited instances.

Mr. Levin pointed out that on the other side are "the forces of evil" such as foreign judges who view their responsibility as limited solely to enforce their laws and foreign professionals who want to protect their fees.    He also said that the United States is now considered to be the largest recipient of offshore funds as foreign citizens are transferring funds to DAPs in the United States.  He described the problem of professionals helping people conceal their assets as a "pervasive problem."

Ms. Hume pointed out that the Cayman Islands are now parties to various statutes requiring disclosures of cash transfers so that there is greater transparency and less advantage to hiding assets in the Cayman Islands.

 The main take-away from the panel was that when dealing with DAPs or offshore trusts, the key is to engage qualified professionals who understand the local law in order to avoid committing malpractice whether trying to set up one of these vehicles or challenging one.

Thursday, October 12, 2017

NCBJ Report: Dean Chemerinsky Says It's Formalism for the Foreseeable Future

The Commercial Law League of America presented a keynote address from Dean. Erwin Chemerinsky, of UC Berkeley Law School at its annual luncheon.  Dean. Chemerinsky discussed his main area of expertise in a talk entitled The Supreme Court:   Appointments to and Statutory and Constitutional Interpretation by the Court in Bankruptcy Cases.   He spoke for over an hour without notes.

He started by talking about the place of bankruptcy cases in the Supreme Court's jurisprudence.  Although bankruptcy cases outnumber every other case in the federal system, the Supreme Court only takes two or three bankruptcy cases in a given term.   He noted that of the current justices on the court only one had served as a trial court judge and several justices had never argued a case in any court before being appointed to the Supreme Court.   As a result, the Court is taking fewer and fewer cases.   For much of the 20th Century, the Court heard as many as 200 cases a term.  Last term the Court heard only 59 cases (not counting cases decided without argument). 

The bulk of his talk discussed the battle between the formalists and the realists on the Court.  He offered three theses:  1)  we have and are likely to continue to have a conservative Supreme Court; 2)  the conservatives and some of the liberals tend to be quite formalistic; and 3) this trend is undesirable.  

Wednesday, October 11, 2017

NCBJ Report: Awards Edition



One thing that conferences like NCBJ celebrate are the best in the profession.  This year I went to three awards presentation.   Prof. Nancy Rapoport of the University of New Las Vegas Law School received the Lawrence P. King Award for Excellence in Bankruptcy from the Commercial Law League of America.   Judge Mary Walrath (Bankr. D. Del.) received the Norton Judicial Excellence Award from the American Bankruptcy Institute and Thompson Reuters.   Finally Judge Homer Drake (Bankr. N.D.Ga.) received the Distinguished Service Award from the Bankruptcy Alliance of the American Inns of Court.