Sunday, July 24, 2011

Congressman Hinojosa's Bankruptcy Plan Appears to Violate Bankruptcy Code, Including BACPA Provisions He Voted For

Congressman Ruben Hinojosa was one of many representatives who voted for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. As a chapter 11 debtor, he will now be tested to see whether must follow the same rules he voted for, as well as those previously in place. In re Ruben Hinojosa, Case No. 10-70900, pending in the United States Bankruptcy Court for the Southern District of Texas.

Special Treatment?

Congressman Hinojosa has represented Texas's 15th Congressional District since 1996. On December 18, 2010, he filed a petition for chapter 11 relief after receiving an unfavorable arbitration award in a proceeding brought by Wells Fargo Bank. His bankruptcy case initially raised concerns about preferential treatment when the United States Trustee signed an agreed order exempting the Congressman from closing his pre-petition bank accounts and providing that he did not need to include the notation "Debtor-in-Possession" on his checks. When he inadvertently included copies of his 2009 federal tax return and his financial disclosure statement on his petition and amended petition, he filed a motion to seal those documents. Bankruptcy lawyer and blogger Alexander Wathen unsuccessfully opposed this motion and has filed an appeal. Wathen v. Hinojosa, No. 7:11cv141, pending in the United States District Court for the Southern District of Texas. You can read about it on Alex's blog here, here and here.

The Plan and Disclosure Statement Make for Interesting Reading

On July 15, 2011, debtor-in-possession Hinojosa filed his plan and disclosure statement which appear to contain flagrant violations of the Bankruptcy Code and at least one violation of BAPCPA.

The Congressman's Disclosure Statement is largely a puff piece for his service in Congress. Most of the 67 pages discuss his Congressional career, while nearly all of the substantive material that would normally be contained in a disclosure statement is buried in exhibits. To put it charitably, the information contained in the disclosure statement is confusing and contradictory.

According to the liquidation analysis, creditors in a chapter 7 liquidation would receive $560,613.56, which would yield a distribution of 20%. The liquidation analysis represents that creditors would receive at least 20% on their claims under the Plan. However, this is NOT what the Plan provides. The Plan states that unsecured creditors will receive sixty payments totaling 0.00009% of their claims. The Congressman's projections indicate that he intends to pay his unsecured creditors (who total nearly $3 million) $250.00 per month. Meanwhile, the Congressman will be spending $3,000.00 a month on rent, $2,244.75 on insurance, $1,154.58 on "college fund and school expenses" and $500.00 per month for "vehicle replacement expense." As a chapter 11 debtor owing primarily business debts, the Congressman is not subject to the means test applicable to consumer debtors in chapters 7 and 13. However, if he were, he clearly would not be allowed to save for his children's college education and for a new vehicle at the expense of his creditors.

The Plan also provides for "sale of all or a portion of the non-exempt assets of the Estate which sums amount to an unknown percentage of the Allowed Unsecured Claims." Under the Means for Implementation section of the Plan, it states that the Congressman will liquidate his real estate holdings. However, going back to the liquidation analysis, the Congressman has only one real estate holding--a property valued at approximately $72,000. Neither the Plan nor the Disclosure Statement say when or how the Congressman will liquidate "some or all" of his non-exempt assets so that the promise of liquidation is so vague as to be unenforceable.

Another outrageous feature of the Plan concerns the discharge. Under BAPCPA, which Rep. Hinojosa voted for, individual chapter 11 debtors do not receive a discharge until they complete their plan payments. 11 U.S.C. Sec. 1141(d)(5). However, Congressman Hinojosa's Plan states:


It seems like the Congressman was not paying attention the day he voted on BAPCPA. Otherwise, he never would have allowed his lawyers to insert this provision into the Plan.

A Final Question

At a minimum, it appears that this Plan violates the chapter 7 liquidation test and the absolute priority rule and probably is not proposed in good faith. Creditors will probably not find much to like about this Plan. However, the big question is what will the U.S. Trustee do? In the Western District of Texas, which has the same U.S. Trustee as the Southern District of Texas, the U.S. Trustee nitpicks thoroughly reviews every minor detail of a plan. Will the same standard apply to Rep. Hinojosa? I hope that the U.S. Trustee will fulfill its role as a watchdog. rather than being a lapdog. (Ed.: Poor choice of words in original posting).

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