Adversary Proceedings In Bankruptcy: Collateral, Liens, Valuation, And Lien Stripping

Overland Park Bankruptcy Attorney

Overland Park Business Bankruptcy Attorney

Adversary proceedings can be used to dispute, remove, or contest liens. The validity of a lien can be disputed by a trustee or a Chapter 11 debtor in possession under several of the various “avoidance” sections of chapter 5 of the Bankruptcy Code. For example:

  • Section 547:  Trustee or debtor in possession can avoid a lien as a voidable preference.
  • Section 548: A lien can be disputed as a “fraudulent conveyance.”
  • Section 544(b): A trustee can use a creditor’s avoidance rights (a creditor holding an unsecured allowable claim) under state or federal law.
  • Section 544(a): A consensual or statutory lien can be disputed as being invalid against a judicial lien creditor, execution creditor, or bona fide purchaser of real property from the debtor. Tax liens can be attacked using adversary proceedings, pursuant to In Re Dunmore, 262 B.R. 85, 87 (Bankr. N.D. Cal. 2001).
  • Section 545: A trustee or debtor in possession can avoid statutory liens on the property of the debtor in certain situations.
  • Section 549: A trustee or debtor in possession can avoid the transfer of most unauthorized post-petition transfers of property of the estate.

There are some situations in which the validity of a lien can be contested indirectly. For example, a secured creditor filing a proof of claim may claim a security interest. The trustee or debtor in possession can object to the claim under F.R. Bankr. P. 3007. If the creditor cannot verify its secured status, the claim may be disallowed as a secured claim.
Sometimes valuation of the collateral in question is an important issue. This issue can come up in adversary proceedings that attempt to strip away the second or third mortgage that is claimed to be wholly unsecured. In Re Mansaray-Ruffin, 530 F.3d 230 (3d Cir. 2008).

Here, the real issue is to what “extent” the secured creditor is secured. If there is no equity in the property to which a lien can attach, then the lien is said to be unsecured.
For example, suppose a house has a fair market value of $150,000. The first mortgage secured against the property is in the amount of $165,000. There is no equity left in the property for any second mortgage to attach to, since the mortgage is larger than the fair market value. Under Section 506(a) of the Code, secured claims are to be valued and allowed as secured to the extent of the value of the collateral, and unsecured for the excess over such value.

This provision is implemented by F.R. Bankr. 3012. Under Rule 3012, the court can determine the value of a claim secured by a lien on property on motion of any party in interest. If a debtor attempts to “strip off” or “strip down” a lien based on valuation, the majority view is that no adversary proceeding is required. Harmon v. U.S., 101 F.3d 574 (8th Cir. 1996); In Re King, 290 B.R. 641, 647 (Bankr. C.D. Ill. 2003); In Re Marsh, 475 B.R. 892, 896 (N.D. Ill. 2012). Local rules and procedures here will provide the best guidance on whether a lien can be removed by motion or by adversary proceeding.

Despite the case law supporting the idea that unsecured mortgages can be removed by motion, in practice most courts prefer that this by done by adversary proceeding, due to the nature of the rights of the creditor that are being affected.In the 8th Circuit, there is case law holding that a debtor can strip off a junior lien of a wholly unsecured claim on a debtor’s principal residence by confirmation of a Chapter 13 plan. In Re Fisette, 455 B.R. 177 (8th Cir. BAP 2011).

If a trustee is in doubt as to the priority of a lien in estate property, an adversary may be appropriate. For example, if the trustee is authorized to sell estate property under Section 363(b) of the Code “free and clear” of other interests, then an adversary might need to be used.A trustee could use Rule 7022 to do this, which permits him to interplead any competing claimants and obtain a determination of the rights of all the various claimants. An adversary proceeding can also be used under Rule 7001 to determine “other interests in property.”

Adversary proceedings have a wide range of uses. They can be used by a Chapter 11 debtor in possession, a debtor in a Chapter 7 or Chapter 13 case, by a trustee, or by a creditor. Besides providing a way to object to the discharge of certain debts, they are commonly used to determine property rights, valuations of secured collateral, extent of security interests, and determinations of ownership priority in collateral.

Read More:  Bankruptcy Adversary Proceedings Under Section 523:  Seeking To Prevent Discharge of Certain Debts

Computer-Based Child Pornography Cases And Defenses

Kansas City Sex Offense Attorney

Internet-based prosecutions for child pornography have skyrocketed since 1997.  Simply stated, internet obscenity cases have skyrocketed.  From 1997 to 2004, there was a 422% increase in federal cases of this type.  The numbers have grown steadily since then.  In 2011, prosecutions were up by 40% since 2006, with an increasing number of more than 9,000 active cases.  Similar numbers have been observed for state-level cases.  We will discuss the background, nature, and defense of computer-based child pornography cases to better understand this expanding and serious area of federal and state prosecution.  Law enforcement agencies have adopted the latest state-of-the art technologies in devoting resources to this area, and deploy their resources accordingly.

18 U.S.C. §2251 criminalizes the use of a minor to “engage in…explicit conduct for the purpose of producing any visual depiction of such conduct.”  The elements of the offense are:

  • The person was under 18 years of age at the time of the offense;
  • The defendant used, persuaded, enticed, or coerced the person to engage in sexually explicit conduct;
  • The defendant voluntarily and intentionally did this for the purpose of producing a visual depiction of such conduct;
  • The defendant knew or had reason to know that the image would be transported across state line; or the image was produced using materials that had been transported across state lines; or the image was actually transported across state lines.

18 U.S.C. §2252 prohibits the possession and distribution of depictions of minors engaged in sexual conduct with a “nexus” to interstate commerce.  The elements here are the following:

  • Transporting child pornography in interstate commerce;
  • Receiving or distributing child pornography that has been transmitted or shipped through interstate commerce;
  • Selling or possessing with the intent to sell child pornography that has been transmitted through interstate commerce;
  • Possessed books or videos of child pornography that has been transmitted through interstate commerce.

A defendant may be liable under this section of he or she uses a computer to access child pornography on a website and knows that his computer stores the images.  What has been heavily litigated is whether knowing possession occurs when a person merely accesses such websites, or views pornography without actively downloading it, and without the awareness that viewing the contraband may “store” the images in the cache.  See, e.g., U.S. v. Tucker, 305 F.3d 1193, 1205 (10th Cir. 2002).  It is also critical to distinguish between “possession” and “receipt.”  To show knowing receipt of such contraband, prosecutors have tended to focus on the following things:

  • Were the images found on the computer?
  • How many images were found on the computer?
  • Was the content of the images clear from the file names of the images?
  • Did the defendant have the knowledge and ability to access the storage area for images?

Problems in these cases can arise from sufficiency of evidence issues.  The hiring and employment of a computer forensics expert is critical in making actual determinations as to the government’s burden of proof.  The government must establish the age of the person(s) depicted in the images in question, and the defendant’s knowledge of such age, although both of these things may be established circumstantially.  U.S. v. Smith, 459 F.3d 1276, 1287 (11th Cir. 2006).

Where the accusation is one of “distribution” (the sharing of images with other parties), a question often arises about “delivery” of the images.  Does there have to be an affirmative “delivery” to someone else, or is “distribution” complete if the files or images are “made available” for sharing with others by means of file-sharing software.  The Ninth Circuit has held, and most courts also hold, that the mere downloading of file-sharing programs and understanding of how they work can satisfy the distribution requirement.  U.S. v. Budziak, 697 F.3d 1105, 1109 (9th Cir. 2012).

Some affirmative defenses to child pornography possession or distribution appear in 18 U.S.C. §2252(c ):

  • Possession of less than three matters containing any visual depiction;
  • Promptly and in good faith, and without retaining or allowing any person, other than law enforcement, to access any visual depiction of illegal conduct, the defendant did the following:
  • Took reasonable steps to destroy such visual depictions, or
  • Reported the matter to a law enforcement agency and afforded that agency access to such materials.

Searches of computers will raise a number of evidentiary issues.  As stated above, expert knowledge of computer forensics will be required to evaluate the following things:  expectations of privacy, probable cause, “good faith”, the plain view doctrine, and consent.  The computer expert witness has become a key player in the process.  Experts are needed to explain how computers work, the age of the persons depicted in visual representations, and the precise nature of the alleged “possession” or “distribution.”  File sharing networks are constantly changing, and it is absolutely critical to have the assistance of an expert in evaluation of these matters.  An aggressive defense that focuses on the nature and deficiencies of the computer evidence, and a solid understanding of the case law in this area, are the ways to successful outcomes.

Read More:  Computer Crimes And Cyber Crimes In Kansas And Missouri

Bankruptcy Crimes And Defenses

Overland Park White Collar Crimes Attorney

In extreme cases of alleged violations of federal bankruptcy laws, criminal accusations can arise.  Bankruptcy crimes are quite rare in practice.  There is a strong presumption that issues arising in bankruptcy cases are best handled by bankruptcy judges and trustees as civil matters.  In rare situations, criminal investigations and accusations do happen, and we will here discuss some of the possible criminal charges that have historically been used by federal prosecutors.  Bankruptcy crimes typically fall within one or more of the following types:  knowingly or fraudulently concealing property, making false oaths or accounts, fraudulently doctoring evidence, or withholding documents.  We will conclude this article with a general discussion of successful defenses to accusations of a bankruptcy crime.

Fraudulent Concealment Or Transfers.  Bankruptcy crimes are described in the subparts of 18 U.S.C.A. §152.  Fraudulent concealment or transfer of assets is therefore criminally governed by 18 U.S.C.A. §152.  The requisite mental state here is one of “specific intent”:  it is necessary to prove that the action was taken “knowingly” and “fraudulently.”  This is often difficult to prove.  “Fraudulently” means making a false representation of a material fact, with knowledge of its falsity and with the intent to deceive.  U.S. v. Berry, 678 F.2d 856, 866 (10th Cir. 1982).  Intent to deceive is different from intent to defraud.  “Knowingly” means with knowledge, and not due to some mistake or accident.  Such knowledge can be inferred, in some situations, from the surrounding circumstances.  U.S. v. West, 22 F.3d 586 (5th Cir. 1994).

Debtors have a duty to disclose all property in their case, including “all legal and equitable interests.”  Concealment does not require physical “hiding” of the asset.  Concealment can be found when someone deliberately prevents discovery of an asset, or withholds knowledge of it.  U.S. v. Weinstein, 834 F.2d 1454, 1426 (9th Cir. 1987).  Concealment can also be the transfer of title coupled with the benefits of ownership.  In Re Bradley, 501 F.3d 421, 434 (5th Cir. 2007).  Section 152(1) of the 18 U.S.C.A. deals with concealing property from the bankruptcy trustee, while Section 152(7) involves deliberate concealment before a case is filed.  The act of concealment may continue for the entire period of concealment to avoid the bar of the statute of limitations.  U.S. v. Stein, 233 F.3d 6 (1st Cir., 2000).  In the Stein case just cited, for example, the bankruptcy was filed in 1990, but the federal indictment was not handed down until 1998.

Not all retaining of assets involves improper concealment.  There is a very important distinction between a transfer that relinquishes one of all interest in property, and a transfer that does not.  In Re Olivier, 819 F.2d 550, 553 (5th Cir. 1987).  If the transfer is absolute, it may not be an act of concealment, even if the creditors have been defrauded.  This distinction is important, as it bears directly on the statutes of limitations for the criminal prosecution of a transfer offense.

False Oaths.  A false oath is basically a false statement or omission in the debtor’s schedules, or a false statement made by a defendant under oath in any part of the bankruptcy proceedings.  The false oath must be made on a material issue.  In other words, a false statement on a minor issue will not suffice.  Section 152(4) of 18 U.S.C.A. deals with false claims.  A false claim is willfully and knowingly participating in the filing of a false claim for the purpose of defrauding the bankruptcy court and the other creditors in the case.

False Treatment Of Documents.  False treatment of documents is dealt with under 18 U.S.C.A. §152(8).  This would arise in cases where an individual falsifies or makes a false entry related to a document related to the affairs of a debtor.  Significantly, a court has held that false statements in disclosure statements and plans of reorganization are not considered knowing and fraudulent false entries under §152(8).  This is so because disclosure statements and plans of reorganization do not relate to a debtor’s financial recordkeeping.  U.S. v. McDaniel, 2006 WL 839095 (W.D. Mich. 2006).  Section 152(9) deals with situations where an individual fraudulently withholds documents from the trustee or the court after the filing of a bankruptcy case.

Defenses To Accusations Of Bankruptcy Crimes.  Most (but not all) defenses to bankruptcy crimes in general relate to (1) lack of materiality; (2) good faith; (3) mistake of law or fact; or (4) entrapment by estoppel.  This list is not exhaustive.  A defendant has the full range of defenses available to him under common law or case law, provided the judge allows it to be included in jury instructions.  “Lack of materiality” boils down to stating that even though a false statement was made, it was pertaining to an immaterial issue.  “Good faith” is the assertion that a defendant was acting without any culpable mental state, or may have been relying on advice from a spouse or governmental agency.  Mistake defenses are similar to the “entrapment by estoppel” defense.  In entrapment by estoppel, a defendant asserts that he or she was relying on the advice of some governmental agency, whose advice turned out to be incorrect.

Criminal charges involving bankruptcy crimes are rare, and are reserved for unusual or extreme situations.  However, if such an accusation is made, it is critical to have legal counsel who is experienced in both bankruptcy law and federal criminal defense.  At Phillips & Thomas LLC, we are uniquely placed in this regard.  Our practice focuses solely on these two areas of law.  When an issues arises that involves both the Bankruptcy Code and the federal criminal statutes, we are able to bring our more than thirty years of collective experience in these two complex areas of law to deal with the problem decisively and successfully.

Read More:  White Collar And Financial Crimes

Criminal Conspiracy Cases In Kansas And Missouri

Overland Park Criminal Attorney

In the United States, the modern laws related to criminal conspiracy began to take shape in the late nineteenth century.  In the most basic definition, conspiracy is an agreement between two or more persons formed for the purpose of committing a crime.  The purpose behind criminalizing conspiracy was twofold:  to exercise some control over “inchoate” (i.e., unripe or incomplete) activities, and to punish group behavior that had crime as its object.  The crime of conspiracy is the illegitimate agreement.  Although simple to define, the offense presents many difficult problems in further analysis.  What is an “agreement”?  At what point does it begin?  What happens if there are multiple agreements over time, or if a person withdraws from the agreement?

Since the essence of the crime of conspiracy is the agreement, the prosecution must first show that an agreement existed to commit a crime.  Direct proof of a formal agreement is not necessary; the existence of an agreement may be shown by drawing reasonable inferences from the conduct of the actors or other circumstantial evidence.  A common course of conduct, aiding and abetting, collusive actions, or other types of circumstantial evidence may suffice, if it is convincing enough.  Conspiracy charges are seen most often in federal court, rather than in state court.  The greater resources available to federal law enforcement agencies for complex investigations with surveillance, wiretapping, and confidential informants may be one of the reasons for this.

In some situations, no overt act need be taken by the conspirators once the agreement is made.  In other words, criminal liability may attach upon the formation of the agreement.  To avoid complicity in a conspiracy, some courts have held that “one must withdraw before any overt act is taken in furtherance of the agreement.”  See, e.g., U.S. v. Karr, 742 F.2d 493, 497 (9th Cir. 1984).  As a further example, one court held that “For drug conspiracies under 21 U.S.C. Sect. 846, no overt act is required.  Once the agreement is made, the offense is complete.” U.S. v. Francis, 916 F.2d 464, 466 (8th Cir. 1990).  Once the conspiracy has formed, a conspirator may withdraw from it, but may still be faced with a conspiracy charge, and for any acts in furtherance of the conspiracy before his withdrawal.  To withdraw from the conspiracy, a person must show that he or she deliberately acted to disavow the purpose of the conspiracy.  A defendant must take timely action, and give notice to his co-conspirators that his participation is finished.

One of the main issues in conspiracy cases is the “overt act” requirement.  In most conspiracy scenarios, the prosecution must show that one of the conspirators took some step in furtherance of the conspiracy.  The step need not be hugely significant, and it need not be unlawful in itself.  Generally, any step in preparation will suffice.  Any act taken by any conspirator will normally be used against all the defendants.  However, some courts have held that if the overt act(s) were performed by defendants who were ultimately acquitted of conspiracy charges, then those overt acts may not be used against other defendants.  U.S. v. Hutchinson, 488 F.2d 484 (8th Cir. 1973).

Generally, the prosecution must show that the conspirators specifically intended both to agree, and to commit, the object offense.  Mere association with a conspirator is not enough:  there must be an intent to agree.  Some uncertainty can arise when the defendants have no knowledge of the illegal nature of the conspiracy’s goal.  This so-called “corrupt motives” doctrine has been resolved in various ways by state and federal courts.  In general, at the federal level, knowledge of the federal nature of the crime (interstate commerce, assault on a federal officer, etc.) need not be shown in a conspiracy prosecution except where the substantive crime requires such proof.

The so-called “Wharton’s Rule” prohibits the prosecution of both the conspiracy and the principal offense when both charges involve the same activity.  In recent years, this rule has been somewhat restricted.  The rule does not apply when the principle offense has not been completed.  The Supreme Court case of Ianelli v. U.S., 420 U.S. 770 (1975) stands for the idea that there is a judicial presumption that dual prosecution for the two offenses is not allowed.

What is important is to examine the nature of the relationships between the parties in such cases.  “Wheel” conspiracies involve one central person who makes arrangements with different persons, who form the “spokes” of the wheel.  “Chain” conspiracies involve various persons who are linked by some unity of purpose in the illegal goal.  Conspiracy law is vast and complex, and became more so with the advent of the RICO statute (18 U.S.C. Sect. 1961-1968).  Entire criminal “enterprises” could be pursued, based on predicate crimes.

Prosecutors may attempt to improperly join multiple defendants in the same indictment, so as to “taint” some by association with others.  Defendants may be joined together if they participate in the same transaction.  The key question in joinder is whether there has been prejudice to the defendant.  Severance—that is, separating one or more defendants from others in an indictment—is at the discretion of the trial judge.  Key considerations that courts will weigh are:  the “spill-over” effect of evidence among joint defendants, conflicts between defendants, and the possibility of antagonistic defenses among defendants.

Conspiracy cases present many challenges for the defense.  They require an awareness of investigative methods and a nuanced understanding of the factual details of a case.  At the early stages of a case, attacking an indictment based on misjoinder, improper venue, multiplicity, or various other legal bases can force the prosecution to narrow its allegations.  Intense scrutiny can then be applied to the following key legal or factual issues:  the alleged “agreement” and “overt act(s)”, the defendant’s state of mind, the merger of the conspiracy and the substantive offense (a favorite prosecution tactic), double jeopardy issues, the duration of the conspiracy, severance, peremptory challenges, and any co-conspirator declarations.  Indeed, the very fact that conspiracy cases are complicated presents many opportunities for an aggressive defense.

Read More:  Computer Crimes and Cyber Crimes In Kansas And Missouri

Using Intoxication As A Defense In Kansas And Missouri

Overland Park Criminal Attorney

It sometimes happens that accusations of crimes happen when one or more parties are under the influence of drugs or alcohol.  Sometimes this intoxication is voluntary (i.e., a person knowingly and deliberately consumed intoxicants) and sometimes it is involuntary (i.e., a person was given intoxicants without his or her knowledge).  Suppose, for example, a person attends a party and drinks punch that has been “spiked.”  He then commits a crime at the party.  When is intoxication (voluntary or involuntary) a defense to a criminal charge?  What are the rules?  The answers can get complicated, depending on a variety of factors.  We discuss the basic outlines here.

First, what is the meaning of the term “voluntary intoxication”?  The word “voluntary” here is generally taken to mean “self-induced”, in that the person intended to have intoxicants introduced in his or her system, and knew of the chemical effects of the intoxicants.  But there are nuances to this definition.  The actor must know he is introducing the substance into his system, but apparently need only be “negligent” as to its chemical effect on his body.  Also, it appears that drugs taken as part of a program of medical advice is not considered “voluntary intoxication.”  This makes sense, as a person should be able to rely on the sound advice of medical professionals.  “Involuntary intoxication” by contrast is intoxication obtained by fraud, deceit, trickery, compulsion, or some other factor that makes the introduction of drugs into the body not a deliberate act.

Where someone’s intoxication is involuntary (as described above), this fact can be used as a defense where the intoxication negates a required element of the offense.  This makes good sense, and it ties in the basic idea of the prosecution needing to prove every element of an offense beyond a reasonable doubt.  But where the intoxication is voluntary or self-induced, the situation can be quite complicated.  Cases and situations will vary greatly, but the following general principles are good ones:

1.      Some jurisdictions permit voluntary intoxication as a defense if it negates any required element of an offense.  Courts have taken steps to limit this rule, but it has some historical lineage.  For example, the 1981 version of the Kansas Statutes (K.S.A. 21-3208(2)) references it.

2.      Some other jurisdictions do not allow voluntary intoxication to negate “recklessness” if the defendant would have known of the risk had he been sober.  The idea here is that a person should not be able to take advantage of a situation (intoxication) that he himself created, and then use that as a defense.  This approach is basically a limitation on the voluntary intoxication defense.  In other words, voluntary intoxication will only be able to negate elements of offenses in certain circumstances.  Under this approach, voluntary intoxication will typically be available to negate the elements of “purpose, motive, or intent.”

3.      Another approach, somewhat older and based on common law, is to allow voluntary intoxication as a defense for “specific intent crimes” but not allow it for “general intent crimes.”  General intent is defined as the intent generally to do the physical act in question.  Specific intent is different.  It is some intent in addition to do the physical act in question that the crime requires.

4.      Some jurisdictions allow voluntary intoxication only as a defense to homicide, if the defendant can show it negates the elements of deliberation or premeditation.  Here again, we have the idea of limiting the scope of the voluntary intoxication defense.

5.      Some jurisdictions refuse to recognize the defense under any circumstances, or only in cases where the voluntary intoxication causes the legal equivalent of insanity.  This rule is a harsh one, not favored by most courts, and can result in unfair outcomes.  Although such jurisdictions may permit intoxication as a mitigating factor in sentencing, that does little to soften the harshness of this approach.

The key thing here is, as in all cases, to a proper analysis of the facts of the case and the law of the jurisdiction in question.  Both Kansas and Missouri have model jury instructions, as do the federal courts, and these should be the starting point for any attempt to use intoxication defenses.  If the facts merit it, and the case law supports it, non-standard jury instructions can be offered to a court during trial, even if they are not found in the model jury instructions.

Read More:  Disorderly Conduct Charges

Buying And Selling Assets In A Chapter 11 Bankruptcy

Overland Park Business Bankruptcy Attorney

Chapter 11 cases are filed for many reasons.  One reason is a for an individual or business reorganization.  Another possible reason is for a business liquidation.  Why would a Chapter 11 case be used for a liquidation, when Chapter 7 already is available for that purpose?  The reasons are many.  In most situations, more value will be gained when the business is “wound down” by the owner gradually over time, rather than sold at “firesale” prices by a Chapter 7 trustee. For example, some real estate cases have property values that will increase as the years go forward.  Having the opportunity to wait for the right moment to sell such real estate can make a huge difference in what type of value is received.  Other types of businesses may have complex operational requirements that cannot just be shut on or off at the flick of a switch.  Chapter 11 solves these problems.

Some businesses are very complicated and can only be effectively managed by the debtor-in-possession himself or herself.  If the debtor manages the shut-down or sell-off of the business assets over an extended period of time, far more value can be obtained than by casting the whole thing in the lap of a Chapter 7 trustee.  Some Chapter 11 cases are filed with the sole purpose of conducting a sale or liquidation of the business assets.

Other advantages of using Chapter 11 for an extended business liquidation or sell-off are:  (1)  the automatic stay operates as a shield from creditors pending the sales or liquidation plan, which can sometimes take years; (2) the value of the business as a going concern is preserved more in a Chapter 11 than in a Chapter 7; (3) lenders have greater protections in Chapter 11 in order to fund post-petition business operations; and (4) sales of property can be accomplished “free and clear” of liens and encumbrances.

Sales of Chapter 11 assets are governed by Section 363 of the Bankruptcy Code.  Sales can be done as part of a filed plan, or more often, by motion to the Court and the entry of an order.  The sale of even “all” of a business’s assets can be done by motion under Section 363 as long as the sale is done for “sound business purposes.”  See Stephens Industries Inc. v. McClung, 789 F.2d 387 (6th Cir. 1986).  There are many situations when a debtor cannot wait for a long period of time to get a plan confirmed, and will need to rely on a motion (even an expedited motion) to get sales done.

Bankruptcy courts will look closely at such sales to make sure that they meet some general requirements:  (1)  the sale is based on reasonable business judgment; (2) marketing efforts have been adequate in the circumstances; (3) the offer is a reasonable one; (4) the transaction is done for reasonable value received; (5) due process and notification requirements have been met.

Sales under Section 363 have other features.  First, a creditor with a security interest in a debtor’s assets cannot prohibit a debtor from selling those assets if there was some clause in the security agreement prohibiting a sale of such assets upon insolvency.  In other words, the filing of the bankruptcy case invalidates any restrictive clauses that a creditor may have put in a security agreement.  Second, a debtor can sell “substantially all” or only “a portion” of its assets.  Such partial sales are a tried and true way of realizing maximum value in a Chapter 11 case.

Notice of the sale is required under 11 U.S.C. Section 363(b)(1), as well as F.R. Bankr. P. 2002.  Notice to the parties must be given, with the opportunity for a hearing.  In general, a court will approve a sale under a deferential standard.  As long as the sale appears to be in the best business judgment of the debtor, and notice is provided, these types of sales usually encounter little if any resistance.

Once the preliminaries are taken care of, a debtor sometimes enters into an agreement with one particular buyer, known as a “stalking horse bidder.”  An agreement with this party is one that is “subject to higher or better bids.”  In other words, the stalking horse bidder’s offer establishes a “floor” which a debtor is assured to get.  He may bet better offers, but at least will not go under this “floor.”

Section 363(f) permits the sale of assets free and clear of all liens, claims, and encumbrances, if any of the following conditions are met:

  • A free and clear sale would be allowed under some non-bankruptcy law
  • The secured party consents to a sale
  • The sale price is high enough to pay off any security interest on the collateral
  • The lien is disputed in good faith
  • The secured creditor could be made to take a monetary amount in a legal proceeding.

It should be noted that Section 363(k) of the Code permits a secured creditor to “credit-bid” the amount of its secured claim, in order to purchase the property in which it holds a lien.  In many smaller cases, however, a sale for a price of less than the value of all the liens is sometimes the only effective option.  Sales also happen free and clear of warranties and representations.  Sales are done “as is and where is.”  The idea here is to move things along as quickly as possible.  Section 363(f) recognizes the need for finality in these sales.

The use of Chapter 11 sales motions is a common way to realize value in either a business reorganization or a liquidation.  Their use requires cooperation of the key players, realistic expectations, and good record-keeping for tax purposes.  The major advantages of using Chapter 11 to liquidate or reorganize are:  control of the business by the debtor, who is best placed to know how to run his or her business; the ability to spread out the liquidation process over a long period of time, thereby ensuring that the best deals possible are negotiated with creditors or bidders; and the tremendous benefit of a buyer acquiring property free and clear of liens.

Read More:  Using The Chapter 11 Sales Procedures In Creative Ways

Adding Unscheduled Assets Or Creditors To A Bankruptcy Case: Is There A Time Limit?

Overland Park Bankruptcy Lawyer

It occasionally happens that a debtor will forget to list a creditor on his or her bankruptcy forms and schedules.  The Bankruptcy Code permits a debtor to amend his schedules to include the missed creditor, even long after a case is closed or discharged.  It also (much more rarely) happens that assets will be identified or recovered long after a bankruptcy has been closed.  But how long is too long?  Or is there any time limit beyond which a creditor cannot be added?  Is there any time limit beyond which a late-discovered asset with tangible value is irrelevant?  Apparently not, one court has ruled.  The case is In Re Dunning Brothers Co., 410 B.R. 877 (Bankr. E.D. Cal. 2009).  In this case, a bankruptcy court ruled that a case that had been closed over seventy years earlier could be reopened to include some assets that had not been listed in the case.

In Dunning, the original case had been filed in 1936 as a corporate case.  Over seventy years later, it was discovered that the corporation had failed to list some land which it had an ownership interest in.  How was this discovered?  A railroad company seeking to buy a right-of-way to lay some tracks probed into the ownership records of the land in question.  When this was done, it became evident that the bankrupt company was still listed as having an ownership interest in the land.  The railroad company wished to buy the land, but due the fact that Dunning had been liquidated by a trustee, the proper owner of the land was actually Dunning’s bankruptcy trustee.  But could the case be reopened to distribute the money from the sale of the land for the benefit of Dunning’s creditors (assuming they were still around)?

In ruling that the old bankruptcy case should be reopened, the bankruptcy court looked at the U.S.’s old Bankruptcy Act of 1898, and also cited an old Supreme Court case named First National Bank v. Lasater 196 U.S. 115, (1905).  Lasater stood for the proposition that a debtor cannot later claim title to assets that it failed to disclose.  Vital to the court’s consideration was also whether reopening the case would serve any purpose, that it, whether there were actually assets to distribute.  Length of time after the closing of an old case was not relevant; as long as good cause existed to reopen the case, it should be reopened.  The modern Bankruptcy Code embodies this same principle in Section 544(d), which states that all property not abandoned or administered remains property of the bankruptcy estate.

Debtors should be mindful of the two sides of the Janus-face here, each of which reflect two  purposes of the Bankruptcy Code, which are:  to protect the legal and equitable interests of possible claimants (creditors) in a bankruptcy estate, and to protect the ability of a debtor acting in good faith to make amendments to schedules long after the case is finished.  On the one hand, courts will not permit a debtor to use time to “hide the ball” from creditors.  On the other hand, courts will also be flexible in permitting a debtor acting in good faith to amend his or her schedules long after the fact, once new and relevant information related to the case is discovered.  A bankruptcy estate truly is an estate.

Read More:  Bankruptcy Adversary Proceedings Under Section 523:  Objecting To Certain Debts

Entrapment As A Defense In Kansas And Missouri

Overland Park Criminal Defense Attorney

Entrapment is a defense available to defendants as a remedy for over-zealous prosecutions.  The defense is defined slightly differently in Kansas and Missouri.  In Missouri, entrapment is defined in R.SMo Section 562.066:

1.  The commission of acts which would otherwise constitute an offense is not criminal if the actor engaged in the prescribed conduct because he was entrapped by a law enforcement officer or a person acting in cooperation with such an officer.

2. An “entrapment” is perpetuated if a law enforcement officer or a person acting in cooperation with such an officer, for the purpose of obtaining evidence of the commission of an offense, solicits, encourages or otherwise induces another person to engage in conduct when he was not ready and willing to engage in such conduct.”

In Kansas, entrapment is defined under K.S.A. 21-3210, which states:

A person is not guilty of a crime if his criminal conduct was induced or solicited by a public officer or his agent for the purposes of obtaining evidence to prosecute such person, unless:

(a)   The public officer or his agent merely afforded an opportunity or facility for committing the crime in furtherance of a criminal purpose originated by such person or a co-conspirator; or

(b)   The crime was of a type which is likely to occur and recur in the course of such person’s business, and the public officer or his agent in doing the inducing or soliciting did not mislead such person into believing his conduct to be lawful.

A defendant wanting to use this defense would need to request it in a jury instruction if his case were tried to a jury.  If illegal conduct is induced or solicited, then it can be viewed as entrapment.  Entrapments happen more often than is commonly supposed.  When permitted as jury instructions, they can be used to negate the specific intent of a crime.

The Two Types of Entrapment

So we have stated the basic elements of entrapment as they appear in Kansas and Missouri statutes.  But a better way of understanding how entrapment works in the real world is to appreciate that there are two different “flavors” of entrapment: traditional entrapment, and entrapment by estoppel.  How do they differ?

Traditional Entrapment

Traditional entrapment is what most people think of when they hear the term.  Undercover sting operations usually come to mind.  In traditional entrapment, we normally see the following things happening: (1)  the government agent secretly and intentionally induced a borderline or unpredisposed defendant to slip into a crime; (2) the defendant is not aware of the government’s involvement; (3) the defendant knew his conduct was illegal and didn’t expect to get caught.  Basically what is happening here is that the defendant is claiming “I was secretly induced into doing something even though I knew it was illegal.”

Entrapment by Estoppel

But there is another type of entrapment.  Entrapment by estoppel is something quite different.  Here, a defendant actually intends to commit the illegal conduct, but he has been assured by a government official that the conduct in question was acceptable.  Essentially, the defendant relies on some mistaken interpretation of the law given to him by a government official, and is later prosecuted for it.  These are the features of entrapment by estoppel:  (1)  the government mistakenly interprets the law; (2) the defendant relied on the government’s advice; and (3) the defendant believed his conduct was legal, and never contemplated prosecution.

As an example, consider a classic entrapment by estoppel case from 1965, Cox v. Louisiana, 379 U.S. 536 (1965).  In this case, police officers had permitted defendant Cox to demonstrate near a courthouse.  He was later prosecuted and convicted for picketing near the same courthouse.  The Supreme Court threw out the conviction, relying on previous entrapment by estoppel case, Raley v. Ohio, 360 U.S. 423 (1959).  The Court stated that “after the public officials acted as they did, to sustain [Cox's] conviction for demonstrating where  they told him he could would be to sanction an indefensible sort of entrapment by the state–convicting a citizen for exercising a privilege which the state had told him was available to him.”

We should mention here that many states have adopted a related type of defense:  mistake of law.  “Mistake of law” is a defense to a crime if a defendant reasonably relies on the advice of a governmental figure, and it later turns out that this reliance was misplaced.  Another defense related to entrapment by estoppel is the so-called “good faith” defense, often seen in tax fraud cases:  a person claims that he relied in “good faith” on something he reasonably believed was the law.

The problem with “mistake of law” and “good faith” is that they often do not quite satisfy the fairness demands of due process.  Entrapment by estoppel is a true constitutional defense, arising from case law.  Unfortunately, it is a defense that is not as well known as it should be.  But there are many situations where entrapment by estoppel can be deployed as part of a comprehensive defense strategy.  It has a compelling line of Supreme Court cases to its credit, and because it is grounded in fundamental fairness, it is likely to resonate with juries and judges.

Read More: Identity Theft And Identity Fraud

Tithing, Charitable Donations, And Bankruptcy: What Is Reasonable?

Kansas City Bankruptcy Attorneys

Bankruptcy trustees and courts permit debtors to make charitable and religious contributions.  Reasonableness is the operative guideline, as it is in much else in the bankruptcy world.  Historically, courts in the United States have been very deferential towards issues implicating religious or cultural freedom.  Even if tithes or charitable contributions are permitted, what is the limit?  Is there a bright line rule?  Or will the court evaluate such gifts on a case by case basis?  And if tithes are so allowed, will that prevent a debtor from claiming the “undue burden” standard in the context of a student loan dischargeability action?  One recent case from the Northern District of Iowa illustrated the interplay between contributions to religious organizations and the possible dischargeability of student loan debt.  The case in question was In Re Lovell (N.D. Iowa, 2012).

In Lovell, the debtor disclosed that she contributed about 11% of her gross income as tithes to a religious organization.  She filed an adversary proceeding seeking the discharge of her student loan debt, arguing (in accordance with 8th Circuit standards) that repayment of the student loan would impose and “undue burden” on her living standards.  She wished to continue her practice of charitable giving, and still discharge her student loans at the same time.  She was employed and was making an income that placed her solidly in the middle class.

The bankruptcy court first held that contributing 11% of one’s income in tithes was not per se unreasonable.  Rather, the better approach would be for an in-depth inquiry into be undertaken to determine whether the expenditure was reasonable, based on a consideration of all the attendant circumstances.  The 8th Circuit’s view of the “undue burden” standard for student loan dischargeability essentially focuses on all the facts and circumstances that a debtor is facing:  current monthly income and expenses are probed into in detail, to determine exactly what the debtor’s prospects might be for paying the loan back.  See, e.g., Walker v. Allie Mae Servicing Corp., 650 F.3d 1227 (8th Cir. 2011).

Of particular interest to the court was the fact that the debtor was still in the early stages of her career.  This being the case, there was a substantial likelihood that her earning power would increase as the years went by.  In addition, she stated that giving to her church was an important part of her religious beliefs.  Interestingly, the court found that whether tithing was “compulsory” was not a determinative factor in weighing the reasonableness of the expense.  This “hands off” approach is in keeping with the long tradition of deference that courts have shown in matters involving religious faith.  Bankruptcy courts in both Kansas and Missouri have both been very generous in their allowances for charitable contributions.  Debtors are often relieved to find out just how much leeway and freedom they are given in this regard.

The Religious Liberty and Charitable Donation Protection Act (RLCDP) is a factor in the background that courts have also been mindful of.  See 11 U.S.C. 1325(b)(2)(A). Congress passed RLCDP as a remedial law after anecdotal evidence accumulated that charitable donations were being avoided as preferential transfers by bankruptcy trustees.  Section 548 of the Bankruptcy Code was amended to allow charitable donations made in good faith, providing some relief to debtors and religious organizations with little ability to fight preference actions in bankruptcy court.

In fact, a survey of the relevant case law shows that most courts have been tolerant of religious contributions that approach 15% of a debtor’s annual income.  Contributions of up to 15% have generally been held to be not presumptively unreasonable, although some creditors in student loan discharge cases have tried to argue that such a contribution would indicate a lack of “undue burden.”  In sum, the Lovell court made the point that no “bright line” rules can be set out for religious contributions.  Like everything else, charitable donations must be viewed in conjunction with everything else that is going on in a debtor’s financial life.  Tithing alone, absent other circumstances, will not disqualify a debtor from satisfying the “undue burden” standard.

Read More:  Student Loans In Bankruptcy In Kansas And Missouri

Confidentiality Orders And Sealing Records In Bankruptcy Court: What Is The Standard?

Overland Park Business Bankruptcy Attorneys

Transparency and due process are fundamental and primary objectives of a functioning legal system.  U.S. courts have historically recognized a presumption of public access to court records.  Nixon v. Warner Commc’ns Inc., 435 U.S. 589, 597-98 (1978). This preference for public access is rooted in the public’s first amendment right to know about the administration of justice. This public access helps to protect the integrity, quality, and respect in our judicial system.  In re Analytical Sys., 83 B.R. 833 (Bankr. N.D. Ga. 1987).  The policy interest in favor of public access is at its best where issues concerning the integrity and transparency of bankruptcy proceedings are involved. Courts have held in the past that unrestricted access to bankruptcy records generally fosters confidence among creditors regarding the fairness of the bankruptcy system.

This may be true in a broad sense, but in the real world of the litigation process, however, it is often true that parties and the court may need to protect certain types of information from release to the general public.  Settlements, deals, and negotiations are generally more fruitful if conducted privately than in the full view of the public eye.  Disputes can arise that are often best resolved in private settings.  Or, the release of certain information may be damaging and may interfere with larger policy objectives.  Thus a tension can develop between the objectives of transparency and due process, and the practical realities of court cases.  Is there a way to square these two possibly conflicting issues?

One recent case from the Western District of North Carolina presented these issues with some illustrative clarity.  The case in question was Legal Newsline v. Garlock Sealing Technologies LLC.  In this case, a bankruptcy court was conducting certain hearings to determine the corporate debtor’s liability for certain types of medical claims.  Because some of the parties to the case were being accused of very serious types of transgressions, those parties sought broad protective orders and sealing requests for some information related to the case.  The bankruptcy court granted the sealing requests, believing that the release of the information would be damaging and not conducive to the interests of justice.  The opposing side appealed the ruling to the District Court, arguing that the information was of public concern and should be made generally available.

The district court reversed the bankruptcy court’s decision, ruling that that the bankruptcy needed to:

  1. Specify the reasons for its decision to seal the record, and make specific findings in that regard;
  2. State the reasons why other alternatives to sealing were inappropriate, so that an appellate reviewer might fully understand the original decision to seal.

The district court basically reiterated the historical precedents, finding that sealing court records is not something that should be done in a cavalier manner.  If a record is to be sealed, there had better be a good reason, and those reasons should be put in the record so that an appellate court might understand the factual basis for the decision.  Other less drastic alternatives should also be explored before the remedy of sealing was used.  Blanket confidentiality orders, if sought by a debtor, are highly disfavored.  Some debtors in bankruptcy cases have taken the position that their “entire business” operations are confidential and need to be “protected.”

However, such blanket confidentiality orders allow the debtor too much control over the flow of information, and may impede the legitimate needs of creditors to know what is going on with a case or a claim.  In addition, overbroad confidentiality requests can drive up the costs of litigation for the parties, by forcing them to undertake special procedures that (e.g., redacting documents) that might not be otherwise necessary.  Debtors should not have this type of unreasonable control over the flow of information in a case, courts have traditionally ruled.  In the influential case of In re Orion Pictures Corp., 21 F.3d 24, 27 (2d Cir. 1994), the Second Circuit explained that “[i]n most cases, a judge must carefully and skeptically review sealing requests to insure that there really is an extraordinary circumstance or compelling need.”  In other words, the circumstances need to be “extraordinary” and the corresponding need must truly be “compelling.”  Even then, other alternatives need to be explored first.

In today’s fast-paced world of information collection, dissemination, and production, it is likely that confidentiality, sealing of records, and disputes over these things will become more frequent than in the past.  Debtors seeking such remedies should be mindful of the standard they must meet.

Read More:  Is “Insolvency” Required Before Filing Bankruptcy?