Business Bankruptcy

Can I Get Sued in a Bankruptcy?

Most people think of filing for bankruptcy to stop lawsuits, but it is possible to get sued in a bankruptcy – or to do the suing. I’ve written recently about people who have been sued in the GMX Resources bankruptcy for fraudulent transfers for receiving dividends on preferred stock and people who have been sued for the recovery of what are called preferential transfers; but there is a lot more litigation than just this going on at the bankruptcy court.

For most people who file for bankruptcy the process looks a lot more administrative than it does judicial. Most people who file never see their Judge, for instance. No, the person who presides over the First Meeting of Creditors is NOT a Judge. Some standard rules of thumb – if there is no court room, no black robe and no standing when the person enters and leaves the room – you are probably not dealing with a Federal Bankruptcy Judge.

Just because most debtors never see them, doesn’t mean that the Judges aren’t staying busy. Bankruptcy litigation comes in two flavors: Adversary Proceedings and Contested Matters. An Adversary Proceeding is essentially a full-scale lawsuit filed within the context of a Bankruptcy case. It begins with a Complaint and a Summons, followed by an Answer, discovery, motions, evidentiary hearings and finally concludes with a trial.

Adversary Proceedings are required to determine the nature or extent of a lien, revoke a discharge or plan confirmation, object to a discharge, recover property of the estate, provide injunctive relief, declaratory relief or subrogation; and certain sales of property must be approved by an Adversary. Essentially anything else in the Bankruptcy Court where two people are arguing or disagreeing qualifies as a Contested Matter, which is quite useful; because in a contested matter you have full access to discovery and other litigation tools that are generally considered part of a lawsuit rather than just a motion hearing.

Some things can be the subject of either an Adversary Proceeding or a Contested Matter. A violation of the automatic stay, for instance, may be brought by either procedure. A violation of the discharge, however, generally is brought by a Contempt Citation, which is a Contested Matter.

So, what is the difference? Adversary Proceedings have greater procedural and due process protections built into them. They must be served like a lawsuit. They have a longer answer time. They have more structure to them which helps to manage greater complexity, a larger number of parties, more witnesses, more complicated issues. Contested Matters are procedurally more flexible. A Contested Matter may be a simple motion – motion with brief filed, fourteen days later a response with brief is filed, hearing set and heard generally in an hour or less. Of course, a Contested Matter may also have a long period of discovery, with related motions filed and culminate in a day or multi-day trial with lots of witnesses and exhibits. So, Contested Matters are inherently more flexible. The Court is expected to adapt procedures to fit the matter at hand. Adversaries are expected to be complex issues and so are treated that way automatically.

For something like a violation of the automatic stay, which may be brought in either form, I consider the following in making my choice: has the defendant appeared in the case, otherwise, the formal service procedures of the Adversary Proceeding will afford greater due process protections. How many facts will be in dispute? What is the nature of my client’s damages? How much post petition discovery will I want? How much time will I want to prepare the case? Even after considering all of these things, I may still file a case and have the Judge adapt the procedures for it as if it were the other. Judges can do that, and they will if they think it is necessary either for due process considerations, to protect the rights of a party or to make the case easier to manage.

So, there you have it. Bankruptcy lawyers may not empanel a jury too often (or ever), but they are still litigators.

Elaine

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Categories: Bankruptcy, Business Bankruptcy, Litigation | Tags: , , , , , , , , , , , , , , , , | Leave a comment

A Friend Tried a Debt Management Plan – It Didn’t Work

There are a ton of debt management companies out there that will promise to consolidate your debt, or reduce your debt or give you ONE, LOW MONTHLY PAYMENT! All too often, they don’t work. Bankruptcy does, and there are really good reasons for that.

Remember two things. First, if it sounds too good to be true, it probably is; and second, there is a huge difference between a contract between you and a private company and Federal Law enforceable by the U.S. Court system with the assistance, if necessary, of the U.S. Marshals.

If you have tried a debt management plan or consolidation plan, one of those places that promises that it is every bit as good as a bankruptcy; only to find that the phone kept ringing, and the lawsuits kept coming? Well, first of all, actually read your contract. My guess is that if you sit down and actually read all the small print, you won’t like what you find. It also won’t promise results or relief. The problem with debt management or consolidation plans is that your creditors are not required to accept a deal that you cut with someone else. Think about it, if your creditors decline to go along with the plan, what is the debt management company going to do about it?

If creditors decide that the Bankruptcy Code doesn’t apply to them, the Bankruptcy Court’s orders are punishable by contempt of court. You won’t find that in the small print of a debt management contract.

Now, there are people who think that a Bankruptcy filing is too good to be true. It really isn’t for a variety of reasons. First of all, it is a public proceeding. Now, that doesn’t mean that your First Meeting of Creditors will be held in the middle of the local shopping mall. It does mean that your court file is a public record. Second, bankruptcy is an admission of failure. It hurts. It is hard to accept. It is hard to do. The for profit debt management companies know this. They play off of it. That is why people pay them and want to believe in them. Third, bankruptcy is about the worst thing you can do to your credit report (although, if you police your credit report post discharge, it won’t be nearly as bad as you expect). Finally, there is really good public policy in favor of our bankruptcy system.

One of many things that separates our economic system from most of the world is that we understand that not only does the freedom to succeed include the freedom to fail, the freedom to fail is necessary for the freedom to succeed. If you can’t afford to fail, you can’t afford to try. This makes more sense in a business context, but the consumer context is that someone with more debt than he can pay is not a contributing member of the economy. He is not taking care of himself and his kids. He isn’t saving for retirement and college. He isn’t out buying stuff, if he is too consumed with trying to pay for the past. Bankruptcy fixes this. That is serious economic policy that was recognized by our founding fathers, which is why the need for a Bankruptcy Code is one of the few areas of law specifically mentioned in the U.S. Constitution.

So, when a private company tells you that they are just as good as the United States Court system. Ask yourself, why you want to believe that.

Then, either contact Consumer Credit Counseling Services, which is one of the few legitimate debt consolidation companies that is non-profit and won’t misrepresent what they can and can’t do; or, admit that if you have too much debt to pay, you have too much to pay – consolidated or otherwise.

Elaine

Categories: Bankruptcy, Business Bankruptcy, Consumer Credit, consumer law | Tags: , , , , , | Leave a comment

In Bankruptcy – Everybody Loses

Most of my clients come to me concerned about losing stuff – house, cars, one woman was terrified that the Trustee would take her hopelessly spoiled Yorkie. Generally, those fears are not well founded – especially the Yorkie. Yes, sometimes debtors file for bankruptcy with assets that are not exempt, and they do have to turn them over to the Trustee. In Oklahoma that is fairly rare, and the Debtor should know it will happen before the case is filed and his lawyer should discuss with him ways to protect those assets. Still, there are times when filing anyway is still the best option.

Of course, there are other things that debtors lose when they file for bankruptcy – privacy, some pride, the ability to easily incur debt to start a business or buy a house. Although in many cases I think the greatest loss is one of a sense of self-sufficiency. For most people it is a great loss to ask the government for help – for protection, to use a Bankruptcy Code term.

These are things my clients think about. They don’t generally think about what other people are losing when a bankruptcy is filed. Sure, they know that their creditors won’t get paid. Of course, generally those creditors aren’t getting paid anyway; but for most institutional creditors, bankruptcy is an accepted cost of doing business. For smaller creditors and other people connected with a bankruptcy that isn’t as true; and a bankruptcy filing can be a huge loss.

I have recently undertaken the representation of some preferred stock holders in GMX Resources, Inc. GMX Resources, Inc. was a small, publicly traded, oil and gas company based in Oklahoma City that filed a Chapter 11 Bankruptcy two years ago. My clients are being sued to recover dividends that they were paid as stock holders in the period leading up to the GMX bankruptcy filing. You can find a discussion of the relevant cause of action, here. In most cases, my initial contact with these former stock holders is that they lost their entire investment in the company, they shouldn’t have to lose anything else! In fact, several people have told me they almost threw the Summons and Complaint in the trash and done nothing. If they had done so, the Trustee would have taken default judgments against them. Instead, I believe that I can successfully defend these cases.

Of course, on an emotional level I completely understand my clients’ initial reactions. One of the truths of human nature is that it is harder to give up something we have received than to have not received it in the first place or not gain it in the future. Once it is ours, it is OURS!.

On the other hand, if the preferred stock dividends at issue here are actually stock dividends (and I think they were more analogous to debt payments, but that is a conversation for another day), then they should not have been paid if it left the corporation unable to pay its bills. Stock dividends are to be paid out of surplus, not necessary operating funds. The creditors should have had access to that money before the bankruptcy was filed, instead, the creditors weren’t paid, the shareholders were; and the company filed for bankruptcy.

The company filed a bankruptcy to reorganize, but it wound up liquidating. Its general, unsecured creditors (people who had provided goods, services, loans) were owed over $81 MILLION when the case was filed. Most of those creditors will never be paid. Sure, there are a lot of institutional creditors for whom it is an expected part of doing business; but among the long list of creditors is a woman in a suburb of Oklahoma City doing business as a caterer. She was owed over $7,000 – money she will never see. To her, that must have been a catastrophic loss.

Then, there are the ongoing losses. GMX’s employees lost their jobs. The attorneys and accountants and contract firms who did business with GMX all lost a client and valuable source of business. The local economy lost part of its tax base. The business community lost a significant local player.

Everybody lost. That is the price of failure. In personal bankruptcies you have an offsetting win. A personal bankruptcy takes someone who has more debt than he can pay, and converts him into a participating member of the economy again. A personal bankruptcy takes someone who can’t care for himself and his family and converts him into someone who can. A personal bankruptcy creates the freedom to try and to succeed, because without the freedom to fail, no one could ever afford to try. One of the real benefits of the American bankruptcy system is that it isn’t punitive. It allows people to fail and try again. That is the beauty of our fresh start. If Walt Disney had not been able to file for Bankruptcy and try again, central Florida would look very different today!

Corporate bankruptcies can be wonderful things when a company successfully reorganizes. Jobs are saved, assets are made more productive, a valuable member of the business community is restored. Unfortunately, that doesn’t always work; and when it doesn’t – everybody loses.

Elaine

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More GMX Resources Lawsuits

Last week I wrote about stockholders in GMX Resources who were being sued as part of its bankruptcy for the recovery of dividends that they received prior to the bankruptcy filings. There are a ton of those cases filed. I haven’t spent a lot of time with the consolidated docket, but it looks like there were just under 200 Adversary Proceedings filed to recover property or payments of some kind in this Bankruptcy. About half of those were filed against owners of Preferred Stock, and I wrote about those last week. It appears that the other half were filed against people, or more frequently companies, who had received what are called Preferential Transfers; and I thought I this would be a good excuse to explain preferential transfers.

Preferential transfers are the product of two policies: 1. To make sure that when someone files for bankruptcy all creditors who have similar legal rights wind up getting treated essentially the same way; and 2. To encourage creditors to give debtors a bit of room to get back on their feet when they start to show signs of financial trouble.

Here are two examples of that. There is a natural inclination when you know you are sinking fast to want to repay loans from people you care about rather than those you might not. So, when that tax refund comes in, and you know you need to file for bankruptcy, are you going to repay the loan from your Mom or a credit card account? Well, yea, of course you are; but in terms of good policy, it isn’t fair for Mom to get better treatment than any other creditor.

This leads us directly into the next reason. If one creditor can get paid when no one else does and that creditor gets to keep the money, then at the first sign of trouble there will be a rush to squeeze money out of the Debtor – a virtual feeding frenzy if you will. Now, consider this in the context of a small business. Something bad happens. The business falls behind on paying its bills. At the first sign of trouble, all of its creditors take immediate steps to make sure that they get paid. The business collapses, because it lacks sufficient cash flow to keep the doors open.

Whereas, if the creditors had given the business 60 or 90 days to find its feet, the business might have stabilized, paid all its creditors, stayed in business, and continued providing an income for its employees and its owner. When you think about it, this kind of thing happens in the life of virtually all small businesses; and as it happens, creditors usually do give businesses time to get back on their feet – but they aren’t doing that at the risk that someone else will be less understanding and wind up with all the money and no one else will get anything. No. Creditors give debtors a chance to get back on their feet, because they know that if someone else doesn’t and the business files for bankruptcy, the money the greedy creditor got will be taken back and distributed out equally.

The tool for recovering those funds? Why an avoidance action to recover a preferential transfer, of course. This is a tool that bankruptcy trustees use frequently. If a Debtor’s wages are garnished in the 90 days before a bankruptcy? Well, that is one creditor getting paid and making sure no one else does. The trustee can take that money back. This is actually kind of nice when a debtor is being garnished and he owes recent taxes. When the trustee takes the garnished wages back, the first creditor he pays is the taxing authority.

There are defenses to preferential transfers, just like there are to fraudulent transfers. There are also times when it can be in a debtor’s best interests to have a Trustee recover preferential transfers. The nice thing about preferential transfers from the Debtor’s perspective is that the window for the transfer is generally quite short. Unless the transfer was made to (or benefited) an insider (like family), the transfer has to have been made within 90 days of the bankruptcy filing. That is a time period that can usually be waited out if necessary. Of course, if the transfer was to a family member, then the look back period is a year. That can be harder to wait out, although I have done it twice in the recent past.

The worst thing you can do about any type of transfer if you are getting ready to file for bankruptcy is to not tell your lawyer about it. I promise you, what he doesn’t know will hurt you.

Elaine

Categories: Bankruptcy, Business Bankruptcy, Litigation, Taxes | Tags: , , , , , , , , , | 1 Comment

For Law Geeks ONLY

Credit Slips has posted a blog entry that brings together both a Business Week article and related source material discussing a possible insolvency filing by BP.  I don’t actually think this is likely in the short run, but it makes for fascinating reading.  I mean, if you’re a serious Bankruptcy law geek. . . .

Elaine

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First Meetings of Creditors — the Questions

The First Meeting of Creditors, or 341 hearing, exists so that the Trustee assigned to administer the case  can make sure he understands the schedules, identify any non-exempt assets he needs to administer and ask the Debtor any questions he needs answered.  Also, any creditors who need to know something (like car lenders who want to know if the Debtor is going to keep a car and verify that it is insured) or someone who believes he has been defrauded and needs a chance to ask a few questions to decide whether or not to pursue an objection to discharge have the right to ask questions as well.  These are the people for whom this hearing exists, but for most clients, it is a non-event.

Once you have been sworn in, you will take a seat to the Trustee’s left, and your lawyer will stand opposite you behind a podium.  Your lawyer will then begin asking you incredibly difficult questions — like your Name.  (You might want to study.)  Your lawyer should go over with you exactly what he will ask before the hearing, but the questions don’t generally get much harder than that first one.

Then, the Trustee has the right to ask you questions if he wants to.   He may ask some basic questions to make sure that he understands everything.  Again, not really much harder than that, “Please state your full name for the record” bit; and your lawyer should give you a pretty good idea of what kinds of things about your case will catch the Trustee’s eye.

After that, any creditors present have the right to ask you questions and so does the U.S. Trustee’s office if they want to.  The U.S. Trustee’s office is generally interested in asking questions about the Means Test, any budget entries that look excessive or anything that might smell like fraud or abuse.

It is that whole idea that their creditors are going to ask them questions that I think really scares my clients.  Look at it this way.   No one is going to pay a representative to drive to the Courthouse and cool his heels through the first part of the docket without a good reason.   Car lenders may want to know if you are going to keep the car and if it is insured.  That makes sense.  They need to know that.

For most of my clients from the time their case is called by the Trustee until they are heading out the door is less than five minutes.

Now, there are exceptions.  Business cases or other cases with significant assets and large  dollar figures involved will take more time.  For one thing, they are more complicated and there is more to understand.  For another, the bigger the dollar figures and the more things going on the greater the opportunity to conceal funds or otherwise commit fraud.

Of course, people who kind of, sort of, forgot to tell their lawyers about the rent house they own in another County or oil and gas rights in Texas  are generally in for an unpleasant surprise.  People who filed Bankruptcy leaving a number of people feeling like they were defrauded or just a ticked off ex-spouse will frequently prefer a root canal without anesthesia.  Clients whose lawyers either didn’t do their jobs or didn’t know their jobs are generally not in for a brief or pleasant time.  Anyone who thought that not mentioning something to his lawyer was a good idea is in for an eduction.  These are generally people for whom the 341 is not pleasant.

That last paragraph was a little smug and isn’t completely true.  There can be plenty of good, honest people who are well represented whose 341’s aren’t fun.  Construction contractors who left a bunch of houses unfinished and bills unpaid will frequently find homeowners showing up to either lay the groundwork for an objection to discharge or just to regain a pound of flesh.  Ex-spouses can be unpleasant additions to a 341 room.

Ask your lawyer if anyone is likely to show up on your case.  Basically, non-institutional creditors (normal people instead of Capital One) are likely to show up just because they got something in the mail and don’t know that they don’t have to.

If your lawyer tells you that you have nothing to worry about, then take a book.  Otherwise, you will leave shaking your head over some poor sod who went before you and didn’t have a good day.  I will post a few of those stories another time.

Elaine

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First Meetings of Creditors — the Background

For most of my clients the First Meeting of Creditors (known familiarly as the 341 hearing) is the only time they have to go to the Bankruptcy Court.   I warn them that it is likely to be the biggest non-event they have ever lost sleep over.  That doesn’t help.  They are almost always  scared to death.

I have to confess that I understand.  Some twenty years ago when  I was a baby lawyer (maybe even still in law school),  I was sent to a Chapter 11 341 to observe.  I was not to ask questions.  I was not to enter an appearance.  I was to observe, take notes and report back.

I was scared to death.  I try to remember this when I look at my clients in the hallway of the courthouse shaking in their shoes.  So, just for the record, this is what a consumer debtor in the Western District of Oklahoma has to look forward to.

First,  airport level security at the door of the Courthouse, and don’t even think about bringing your cell phone into the building with you.  Second, a  crowded room filled with other people who have filed for Bankruptcy, their lawyers and a few creditor representatives.  Third, (unless you are at the top of the docket) — boredom.   Bring a book.

When your case is called you and your attorney will go to the front of the room.  The first thing you will do is give to the Trustee presiding over the docket (no, he is not a Judge) your Government issued photo ID (like a driver’s license) and proof of your full Social Security Number.  He will then verify that you are in fact who you claim to be.  You see how difficult this is?  (Believe it or not identity theft does occasionally turn up in the Bankruptcy system.)

Then, you will give to the Trustee, or the Trustee’s assistant, the documents you were told to bring to the meeting.  Generally, in this District those documents are:

  • Car Titles to all vehicles in which you have an interest;
  • Current month’s pay stubs;
  • Three months’ bank statements for all accounts (the one showing the date the bankruptcy was filed and the two before that).

Your Attorney should have already provided your two most recent tax returns to the Trustee’s office.

Then, of course, you proceed to the purpose of the meeting — the questions.  This post was getting far too long, so those will be covered in a separate post.

Elaine

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Small Business and Bankruptcy

Clients call me about filing for bankruptcy, and they own a small business.  It may be a retail store, a restaurant, a trucking company, a temporary employment agency — you name it.  The businesses vary, the nature of the problems vary, the business may be a success and other things are the problem, there is only one constant.  I have never had a small business owner walk in and know all of the things I needed to know to help him sort out his options with respect to his debts.  Never.  Not once.

So, here is a list:

  1. Is the business a separate entity, i.e. corporation, LLC, partnership, sole proprietorship (d/b/a) or something else?
  2. Assuming that the business is a separate entity, what does it own?
  3. What creditors have liens against business assets and which assets do they have liens on?
  4. What debts does the business have and which of those are you also liable for?
  5. Is the business viable or does it need to be shut down?
  6. If it needs to be shut down, what is the best way to realize value from the remaining business assets and is any particular creditor entitled to that value?
  7. Which creditors need to be paid first and why?
  8. How have you been paid for running the business?
  9. How have you contributed money to the business to keep it afloat (contributions to capital, loans)?
  10. How is the business taxed (does it file its own return, is its income reported on your return)?
  11. What business records exist and where are they?

This is certainly not an exhaustive list, and there may be a question or two that don’t apply to every scenario (especially to a scenario where the business is a viable concern).  However, these are all things that every business owner really should know.

I intend to flesh out this list over the next few weeks.  So, check back.  I will create a new category for Business Bankruptcy to make additional posts easy to find.

Elaine

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