Compelling A Bank To Accept Surrendered Real Estate In A Chapter 13 Plan: Vesting Without Consent

It is no secret that the 2008 financial crisis, and the real estate collapse that followed, threw the real estate market into chaos.  Many lenders found themselves reluctant to foreclose on properties that might have left them liable for homeowners’ dues, association fees, or property taxes.  Many of these lenders also found out—or already knew—that the values of their properties were not worth what they had been saying they were worth.  As a result, many properties were stuck in limbo.  They did not want to continue to deal with property maintenance issues for properties they wanted to surrender back to the banks.

But what happens when the bank refuses to foreclose, or takes an unreasonably long time?  In some jurisdictions, the non-payment of property taxes can trigger an automatic foreclosure after several years.  But what if a debtor doesn’t want to wait that long?

A bankruptcy court in the District of Oregon dealt with this issue in October 2014.  The case was In Re Watt, 520 B.R. 834 (D. Oregon, 2014).  In this case, the debtors filed a Chapter 13 plan that provided for the surrender of their property back to the creditor, Bank of NY Mellon.  The plan contained language that said the following:

Upon entry of an Order Confirming this Chapter 13 Plan, the property at 56 B NW 33rd Place in Newport, Oregon shall be vested in The Bank of New York Mellon fka The Bank of New York, as trustee for the Certificateholders of the CWALT, Inc., Alternative Loan Trust 2006–OA21, Mortgage Pass–Through Certificates, Series 2006–OA21, its successors, transferees or assigns pursuant to 11 U.S.C. 1322(b)(9). This vesting shall include all of Debtor’s legal and equitable rights. This vesting shall not merge or otherwise affect the extent, validity, or priority of any liens on the property. Creditors potentially affected by this paragraph include:  The Bank of New York Mellon aka Select Portfolio Servicing, the Bank of America, Lincoln County Tax Assessor and Meritage Homeowners Association.

The bank objected to this language, claiming that it could not be compelled to accept the property.  The court first noted that 11 U.S.C. § 1325(a)(5)(C) provides that with respect to a secured claim, a plan may surrender the property securing the claim to the holder of the claim. The debtors had vacated the property and made it available to BONY Mellon.  But the court noted that surrender merely establishes the debtor will not oppose the transfer of the collateral. Absent some further action, such as foreclosure, deed in lieu of foreclosure or short sale of the property, surrender does not divest a debtor of ownership and its obligations.  The court cited  In re Spencer, 457 B.R. 601 (E.D.Mich.2011) and In re Anderson, No. 12–37458–tmb13, Hr’g Tr. 23–24.

But can a Chapter 13 plan be used to “vest” property in another party, against their will?  This was the big issue.  The court approached it methodically.  It first noted that the debtors were in an unfair situation:  they wanted to get a fresh start, but the bank was sitting on its hands and not foreclosing.  At the same time, homeowner’s dues were continuing to accrue, and under the Bankruptcy Code, post-petition homeowner’s dues continue to be the debtor’s responsibility until his or her ownership interest in the property ends.  The situation was preventing the debtors from getting a fresh start, which is one of the primary purposes of the Bankruptcy Code.

The debtors argued that §1322(b)(9) of the Code permitted them to use a plan to transfer title in real estate back to the lender, even against the lender’s consent.  The bank, of course, disagreed.  The debtors cited a Chapter 13 case in which debtors sought to compel a secured party to take title to property surrendered in a bankruptcy proceeding.  The cited case was In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013).  In this case, the debtor proposed a plan which provided for surrender of her real property and that title to the property would vest in the secured lender upon confirmation.

The Chapter 13 Trustee in Rosa objected to the plan, arguing that the plan provision vesting title in the secured lender was improper. The debtor disagreed, arguing that the vesting provision of the plan was authorized by §1322( b)( 9). The bankruptcy court agreed with the debtor in this case.  However, the court concluded that a debtor’s rights under §1322( b)( 9) were somewhat limited by the requirements of §1325(a)(5) regarding treatment of secured claims.

The debtors also cited another case, In re Rose, 512 B.R. 790 (Bankr.W.D.N.C. 2014).  In this case the debtors sought to quitclaim the property back to the lender, the SBA, by using a motion, rather than language in a confirmed plan.  The Rose court did not agree that a bank could be compelled to accept title in property without going through the foreclosure process.  It concluded that a secured lender could not be compelled to accept title without its consent as “taking title by deed could impair a lender’s rights in the collateral, subject it to ownership liabilities that it never would have voluntarily assumed and contravene state property law.”  This was a disappointing conclusion, and probably wrongly decided.  It focused entirely on the bank’s rights, while ignoring the rights of the debtors, and the significant hardship that was being imposed on them by being “in limbo” with regard to the property.

Finally, the Watt court was ready to issue its ruling.  It disagreed with both the Rosa and the Rose decisions.  Section 1322(b)(9) could indeed be used to force a lender to accept back its real estate, period.  The court noted that the plain language of the Code section read “vest.”  Vesting means transfer of title.  It was not appropriate to read additional qualifiers into that language.  It was plain and simple:  there was nothing in the plain language of §1322(b)(9) that required a lender’s “consent” in the vesting process.

The only limitation to using Section 1322(b)(9) for this purpose was “good faith.”  The vesting provision could not be used as an aid to fraud or malfeasance, in other words.  The court said the following:

However, under § 1325(a)(3), the court may not confirm a plan unless it is proposed in good faith. Accordingly, confirmation could be denied if a debtor attempts to use §1322(b)(9) to transfer property to a third party in order to relieve him or herself of responsibility for nuisance or environmental problems associated with it. In this case, there are no such concerns.

Obviously, such concerns (i.e., property transfers in bad faith to avoid some sort of “ticking time bomb”) are extremely rare.  In the real world of bankruptcy practice, debtors just want to shed themselves of their real estate involvements, and get a fresh start.  The court ruled that, in situations where lenders refuse to move, a confirmed plan can accomplish this goal.

What the court found particularly irksome was the bank’s refusal to act.  After all, it was the banks who had caused the financial crisis in the first place; and now some of them were trying to keep bad loans on their books by refusing to foreclose.  This situation is not acceptable.  It hurts the debtors, the other people in the homeowner’s association (who have to absorb the costs), the neighborhood, and the economy at large.  The court used the following colorful language:

BONY Mellon resists taking title and surrender but yet seeks relief from the automatic stay to foreclose at an undeterminative date with no commitment to moving forward. BONY Mellon did not offer to waive its security and be treated as an unsecured creditor. It reminds me of the old adage of the dog in the manger. The dog cannot eat the hay but refuses to let the horse or the cow eat it either. BONY Mellon would rather sit on the hay. This creates a stalemate.

It seems likely that such “vesting” cases will become more common in the near future.  Bankruptcy courts may (hopefully) in the coming years take a dim view of banks who continue to clog up the local and national economy by refusing to foreclose on properties that belong to them.  It is hoped that the Watt case will be a portent of things to come with regards to the glut of surrendered properties in many parts of the country.  Thus far, legislators have been blind to the problem.  For many debtors, action on this front can’t come soon enough.

Read More:  Defalcation In A Fiduciary Capacity:  Adversary Proceedings Under Section 523(a)(4)

Sexting Laws In Kansas And Missouri

“Sexting” is the term used to describe the sending or receiving of sexually explicit images, usually by means of a hand-held smart phone.  The ready access to photographic technology, and the ease with which photos can now be taken, mean that users of cell phones are more likely to take advantage of the technology.  Cell phones and smart phones are here to stay, and with this presence comes possible dangers.  What may seem funny or amusing is most certainly not.  When minors “sext” photos to others, even photos of themselves, serious criminal issues can be implicated.

“Sexual exploitation of a child” under Kansas law (K.S.A. 21-5510) is the following:

21-5510. Sexual exploitation of a child.  (a) Sexual exploitation of a child is:

(1) Employing, using, persuading, inducing, enticing or coercing a child under 18 years of age, or a person whom the offender believes to be a child under 18 years of age, to engage in sexually explicit conduct with the intent to promote any performance;

(2) possessing any visual depiction of a child under 18 years of age shown or heard engaging in sexually explicit conduct with intent to arouse or satisfy the sexual desires or appeal to the prurient interest of the offender or any other person;

(3) being a parent, guardian or other person having custody or control of a child under l8 years of age and knowingly permitting such child to engage in, or assist another to engage in, sexually explicit conduct for any purpose described in subsection (a)(1) or (2); or

(4) promoting any performance that includes sexually explicit conduct by a child under 18 years of age, or a person whom the offender believes to be a child under 18 years of age, knowing the character and content of the performance.

(b) (1) Sexual exploitation of a child as defined in:

(A) Subsection (a)(2) or (a)(3) is a severity level 5, person felony; and

(B) subsection (a)(1) or (a)(4) is a severity level 5, person felony, except as provided in subsection (b)(2).

(2) Sexual exploitation of a child as defined in subsection (a)(1) or (a)(4) or attempt, conspiracy or criminal solicitation to commit sexual exploitation of a child as defined in subsection (a)(1) or (a)(4) is an off-grid person felony, when the offender is 18 years of age or older and the child is under 14 years of age.

(c) If the offender is 18 years of age or older and the child is under 14 years of age, the provisions of:

(1) Subsection (c) of K.S.A. 2012 Supp. 21-5301, and amendments thereto, shall not apply to a violation of attempting to commit the crime of sexual exploitation of a child as defined in subsection (a)(1) or (a)(4);

(2) subsection (c) of K.S.A. 2012 Supp. 21-5302, and amendments thereto, shall not apply to a violation of conspiracy to commit the crime of sexual exploitation of a child as defined in subsection (a)(1) or (a)(4); and

(3) subsection (d) of K.S.A. 2012 Supp. 21-5303, and amendments thereto, shall not apply to a violation of criminal solicitation to commit the crime of sexual exploitation of a child as defined in subsection (a)(1) or (a)(4).

(d) As used in this section:

(1) ”Sexually explicit conduct” means actual or simulated: Exhibition in the nude; sexual intercourse or sodomy, including genital-genital, oral-genital, anal-genital or oral-anal contact, whether between persons of the same or opposite sex; masturbation; sado-masochistic abuse with the intent of sexual stimulation; or lewd exhibition of the genitals, female breasts or pubic area of any person;

(2) ”promoting” means procuring, transmitting, distributing, circulating, presenting, producing, directing, manufacturing, issuing, publishing, displaying, exhibiting or advertising:

(A) For pecuniary profit; or

(B) with intent to arouse or gratify the sexual desire or appeal to the prurient interest of the offender or any other person;

(3) ”performance” means any film, photograph, negative, slide, book, magazine or other printed or visual medium, any audio tape recording or any photocopy, video tape, video laser disk, computer hardware, software, floppy disk or any other computer related equipment or computer generated image that contains or incorporates in any manner any film, photograph, negative, photocopy, video tape or video laser disk or any play or other live presentation;

(4) ”nude” means any state of undress in which the human genitals, pubic region, buttock or female breast, at a point below the top of the areola, is less than completely and opaquely covered; and

(5) ”visual depiction” means any photograph, film, video picture, digital or computer-generated image or picture, whether made or produced by electronic, mechanical or other means.

Sexting could also fall under the Kansas statute for “promoting obscenity to a minor”, which is codified in K.S.A. 21-6401, shown in part below.  Note here that the mental state required is only “recklessly”, which is a lower mental state than “knowingly” or “deliberately.”

21-6401. Promoting obscenity; promoting obscenity to minors.

(a) Promoting obscenity is recklessly:

(1) Manufacturing, mailing, transmitting, publishing, distributing, presenting, exhibiting or advertising any obscene material or obscene device;

(2) possessing any obscene material or obscene device with intent to mail, transmit, publish, distribute, present, exhibit or advertise such material or device;

(3) offering or agreeing to manufacture, mail, transmit, publish, distribute, present, exhibit or advertise any obscene material or obscene device; or

(4) producing, presenting or directing an obscene performance or participating in a portion thereof which is obscene or which contributes to its obscenity.

(b) Promoting obscenity to minors is promoting obscenity, as defined in subsection (a), where a recipient of the obscene material or obscene device or a member of the audience of an obscene performance is a child under the age of 18 years.

(c) (1) Promoting obscenity is a:

(A) Class A nonperson misdemeanor, except as provided in (c)(1)(B); and

(B) severity level 9, person felony upon a second or subsequent conviction.

(2) Promoting obscenity to minors is a:

(A) Class A nonperson misdemeanor, except as provided in (c)(2)(B); and

(B) severity level 8, person felony upon a second or subsequent conviction.

In Missouri, there are several statutes that can be used to cover “sexting.”  These laws revolve around prohibitions of possession, making, or distributing child pornography.  The younger the victim is, the more severe the penalty.  Missouri statutes covering these offenses are:  RSMO Sections 573.010, 573.023, 573.025, 573.035, and 573.037.  Furthermore, the crime of “sexual misconduct involving a child” is covered under RSMo. 566.083:

566.083. 1. A person commits the offense of sexual misconduct involving a child if such person:

(1) Knowingly exposes his or her genitals to a child less than fifteen years of age under circumstances in which he or she knows that his or her conduct is likely to cause affront or alarm to the child;

(2) Knowingly exposes his or her genitals to a child less than fifteen years of age for the purpose of arousing or gratifying the sexual desire of any person, including the child;

(3) Knowingly coerces or induces a child less than fifteen years of age to expose the child’s genitals for the purpose of arousing or gratifying the sexual desire of any person, including the child; or

(4) Knowingly coerces or induces a child who is known by such person to be less than fifteen years of age to expose the breasts of a female child through the internet or other electronic means for the purpose of arousing or gratifying the sexual desire of any person, including the child.

The provisions of this section shall apply regardless of whether the person violates this section in person or via the internet or other electronic means.

It is not a defense to prosecution for a violation of this section that the other person was a peace officer masquerading as a minor.

The offense of sexual misconduct involving a child is a class E felony unless the person has previously been found guilty of an offense under this chapter or the person has previously been found guilty of an offense in another jurisdiction which would constitute an offense under this chapter, in which case it is a class D felony.

Missouri also has a statute that forbids the furnishing of pornographic materials to a minor, RSMo. Sect. 573.040:

573.040. 1. A person commits the offense of furnishing pornographic material to minors if, knowing of its content and character, he or she:

(1) Furnishes any material pornographic for minors, knowing that the person to whom it is furnished is a minor or acting in reckless disregard of the likelihood that such person is a minor; or

(2) Produces, presents, directs or participates in any performance pornographic for minors that is furnished to a minor knowing that any person viewing such performance is a minor or acting in reckless disregard of the likelihood that a minor is viewing the performance; or

(3) Furnishes, produces, presents, directs, participates in any performance or otherwise makes available material that is pornographic for minors via computer, electronic transfer, internet or computer network if the person made the matter available to a specific individual known by the defendant to be a minor.

  1. It is not a defense to a prosecution for a violation of this section that the person being furnished the pornographic material is a peace officer masquerading as a minor.

  2. The offense of furnishing pornographic material to minors or attempting to furnish pornographic material to minors is a class A misdemeanor unless the person has been found guilty of an offense committed at a different time pursuant to this chapter, chapter 566 or chapter 568, in which case it is a class E felony.

There are a number of federal statutes that could possibly cover “sexting” types of scenarios, but these are not commonly used in this manner.  The point here is that “sexting” can be an extremely serious matter.  Sex offender registration is also an issue with these cases.  Parents and those in positions of authority should educate their children that under no circumstances should “sexting” be engaged in.

Read More:  Computer Child Pornography Cases In Kansas And Missouri

With Guarantor, Separate Classification Of Unsecured Claim In Chapter 11 Plan Allowed

A Ninth Circuit B.A.P. case from 2012 addressed an issue in a Chapter 11 “single asset” real estate case where the debtor sought to confirm its plan over the objection of an undersecured lender.  The case was In Re Loop 76 v. Wells Fargo Bank, na (465 B.R. 525 (9th Cir. B.A.P. 2012)).  The key issue in the case was whether the bankruptcy court could consider a “third party” source of payment (in this case, a guarantor), when deciding whether unsecured claims are substantially similar under 11 U.S.C. §1122(a).  Basically, the debtor wanted a large unsecured claim (a guarantor claim on a secured debt) to be classified separately from other unsecured creditors, so that the anticipated “no” vote on confirmation would not taint the acceptance of the plan by the other unsecured creditor class.

Often in real estate cases there are very large unsecured claims, possibly arising out of deficiency claims.  If such a deficiency claim were placed in the same class as the other general unsecured creditors, it might negate the acceptance of that class.  However, if such a debt were placed in a separate class, it might give the debtor more flexibility in confirming a plan over the objection of the creditor.

Loop 76 was a commercial real estate developer which had obtained a commercial loan of about $23 million from Wells Fargo Bank.  The loan was secured against an office complex.  There were also personal guarantees for the loan, signed by the principals of Loop 76.  Loop 76 eventually defaulted on the loan, due to the collapse of the real estate market in 2008-2010.  A Chapter 11 petition was eventually filed by Loop 76.  Since the property in question was only worth about $17 million, there was a large deficiency claim held by Wells Fargo.  The proposed plan attempted to classify the deficiency claim separately from the other unsecured creditors.

Wells Fargo objected to this treatment, believing that they should be lumped in with all the other unsecured creditors.  They were, according to Wells Fargo, “substantially similar” to the other unsecured creditors such that separate classification was not justified.  The attempt to create a separate class was, argued the creditor, nothing more than an attempt to “gerrymander” acceptance of the plan by needlessly creating a separate class of creditor.  Wells Fargo also continued to pursue the guarantors of the real estate loan in state court.

The bankruptcy court, weighing the issues, ruled against Wells Fargo.  Examining the history and intent of Section 1122(a) and Section 1129(a)(10), the court found that Wells Fargo had an alternate source of repayment, what it called a “third party” repayment source.  Such a creditor is different from a creditor who has no such alternate source of repayment.  Wells Fargo could provide no evidence that the guarantors themselves were insolvent or that they were no longer pursuing the guarantors.  Thus, the court found that there was a legitimate basis for putting Wells’s deficiency claim in its own class.

Wells Fargo appealed the decision to the 9th Circuit B.A.P.  The B.A.P. affirmed, noting that Wells had a third-party repayment source, unlike any of the other general unsecured creditors.  Thus, there was a compelling reason to put it in its own class.  Having a guarantor was a situation that no other unsecured creditor had.  A court can consider third party sources of repayment, the B.A.P. held, when trying to decide if unsecured claims are substantially similar under Section 1122(a).

Furthermore, it caught the B.A.P.’s attention that, if Wells’s claim were placed in the same class as all the other unsecured creditors, it would have dwarfed all the other unsecured claims, since it was such a large dollar amount.  It would have controlled the class and have been able to veto the acceptance of the proposed plan.  In the interests of fairness, it made sense to put Wells’s claim in its own class, segregated from the other unsecured claims. The Bankruptcy Code permits the creation of separate voting classes of creditors, provided that there is a rational basis for it and the claims are not “substantially similar.”  Not surprisingly, this issue can become a litigated one, if voting on plan confirmation turns on the acceptance or rejection of such a class.

Read More:  Classification Of Claims And Interests In Chapter 11 Bankruptcy 

Fines And Restitution From Criminal Cases Are Protected In Bankruptcy

In bankruptcy, debts originating from fines or penalties in criminal cases are generally not dischargeable. A 2014 ruling by the 8th Circuit Bankruptcy Appellate Panel (B.A.P.) has restated this point. The case in question was Behrens v. United States (In Re Behrens, No. 13-6052, 2014 Bankr. LEXIS 565, Feb. 12, 2014). In Behrens, the debtor had a pre-existing lien against the debtor that was in the nature of criminal restitution. The debtor, Bryan S. Behrens, had been convicted of securities fraud in 2011; part of his restitution was approximately $6.8 million owed to United States. Behrens had entered a consent judgment against himself with the SEC.

However, this was not the end of the matter. Behrens filed for bankruptcy protection and sought to have the bankruptcy court prevent the United States from collecting its 2011 restitution judgment. According to the debtor, this attempt to collect a pre-existing debt was a violation of the automatic stay. But Behrens did not stop there. He also initiated an adversary proceeding against the United States, in which he sought to avoid the $6.8 million restitution judgment. He was unsuccessful. The bankruptcy court dismissed Behrens’s complaint under Fed.R.Civ.P. 12(b) for his failure to state a claim upon which relief could be granted, concluding “[Behrens’s] complaint seeks to collaterally attack the validity of a pre-petition judgment entered by the United States District Court. [Behrens] may not use a bankruptcy adversary proceeding to collaterally attack a pre-petition judgment.”

Behrens timely appealed the bankruptcy court’s order, raising several issues, all of which related to his claim that the criminal judgment was invalid because the government allegedly failed to obtain the district court’s permission before commencing the criminal case against him. The B.A.P. had this to say about the legal merits of the case:

The bankruptcy court correctly dismissed Behrens’s adversary complaint. If he has “a valid and compelling argument” challenging the validity of the criminal judgment from which the restitution debt and attendant lien arose, Behrens will need to make that argument to the district court that entered the judgment. Mitrano v. United States (In re Mitrano), 468 B.R. 795 (E.D. Va. 2012). Any lien held by the United States arose from the criminal judgment, and Congress has specifically given criminal judgments, including restitution awards and attendant liens, special protection from discharge in bankruptcy. See, e.g., 11 U.S.C. § 523(a)(13) and 18 U.S.C. §§ 3613(e), 3663, 3663A, and 3664. Behrens did not challenge the validity, priority, or extent of the government’s lien on any grounds other than his contention that the government’s criminal action violated the district court’s stay of actions and proceedings against him. He thus failed to present any issues the bankruptcy court could appropriately decide. Finally, Behrens did not specifically identify or quantify under 11 U.S.C. § 362(k) any damages arising from the government’s alleged violation of the automatic stay for the bankruptcy court to consider. Any alleged damages to which Behrens alluded in his complaint arose only from his criminal conviction and the alleged violation of the district court’s stay.

The bankruptcy court dismissed his adversary action, and when he appealed it, the 8th Circuit B.A.P. affirmed the dismissal. The B.A.P. noted that criminal restitution judgments are granted special protections in bankruptcy proceedings. Further, Behrens did not challenge the extent, priority, or validity of the lien (leaving open the question that, had he done so, there may have been legitimate issues he could have raised). The B.A.P. viewed Behrens’s adversary as little more than a disguised attack on the criminal judgment itself.

What do we conclude from all of this? For one thing, it reminds us of the fact that fines and restitution arising from criminal cases are afforded special protections in bankruptcy. However, even if such cases, there are still things that debtors can do who may be facing large fines and penalties from old criminal convictions. Under the right circumstances, such liens might be able to be avoided or challenged in adversary proceedings where a court looks into the validity, extent, and priority of such a lien. Behrens, unfortunately, did none of these things.

Most people who have fines and restitution from criminal cases owe amounts that are nowhere near as much as Behrens owed.  In those situations, it is often possible to use Chapter 13 or Chapter 11 to work out favorable repayment terms with governmental entities, or even lump-sum settlements.  Depending on the circumstances, this also might be able to be done at reduced interest or zero interest.

Read More: Drunk Driving Debts And Bankruptcy In Kansas And Missouri

Is A Late-Filed Tax Form A “Tax Return” For Dischargeability In Bankruptcy?

Is an untimely 1040 Form, filed after the Internal Revenue Service has assessed a tax liability, a tax return for the purpose of the exceptions to discharge in § 523(a)(1)(B)(i) of the Bankruptcy Code?  This was the question that the Tenth Circuit Court of Appeals recently decided in the case of In Re Mallo, decided on December 29, 2014  (Appeal from the United States District Court for the District of Colorado, (D.C. Nos. 1:13-CV-00098-LTB and 1:12-CV-03380-LTB).

The case was actually a consolidated appeal from two cases, In Re Mallo and In Re Martin.  The appeal came out of Colorado.  The background to the cases involved situations where bankruptcy debtors had not filed tax returns for certain years.  Edson Mallo and Liana Mallo did not file timely federal income tax returns for 2000 and 2001 as required by the Internal Revenue Code. As a result, the IRS issued statutory notices of deficiency pursuant to 26 U.S.C. §§ 6212 and 6213 for those years. The Mallos did not challenge those determinations.

The Internal Revenue Service assessed taxes, including penalties and interest, against the Mallos for various years of delinquencies.  The IRS began collection efforts in 2006.  In 2007 the Mallos filed additional returns for past due years.  The other appellant, Martin, had a similar history of delinquent returns.  The IRS tried to make collection efforts against him as well.

The Mallos later filed a Chapter 13 bankruptcy case, which was eventually converted to a Chapter 7 case.  They filed an adversary action against the IRS, seeking a determination that the income tax debts had been discharged.  The IRS filed a motion for summary judgment in the case, claiming that because the Mallos had not filed a tax return for certain years at issue, the tax debts should not be discharged.  The bankruptcy court agreed with the IRS and granted the motion.  The Mallos appealed.

Mr. Martin, the other appellant, received a different result.  He also filed an adversary action against the IRS seeking a determination that certain income tax debts were discharged.  In his case, a bankruptcy court found that his delinquent filed Form 1040 did, in fact, qualify as a tax return.  Thus, his tax debts were found to be discharged.  The IRS appealed.  Both the Martin case and the Mallo case were thus consolidated.

The Court of Appeals thus had to decide what actually constitutes a “tax return” for the purposes of dischargeability under Section 523.  The Court found that:

The hanging paragraph [of Section 523] defines “return” as “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” Id. § 523(a)(*). It then explains which tax forms prepared under § 6020 of the Bankruptcy Code fall within that definition. Thus, the plain language of the statute requires us to consult nonbankruptcy law, including any applicable filing requirements, in determining whether the tardy tax forms filed by the Mallos and Mr. Martin are returns for purposes of discharge.

The Court reviewed some decisions of other circuits on this issue.  What was important to the Court was the idea that filing requirements for tax returns included “deadlines.”  And because the applicable filing requirements include filing deadlines, § 523(a)(*) plainly excluded late-filed Form 1040s from the definition of a return.  In other words, a delinquent Form 1040 did not constitute a “return” for the purposes of Section 523(a)(*).  An untimely filed tax form cannot constitute a “tax return” for the purposes of dischargeability in bankruptcy.  Why?  Because a due date is an applicable filing requirement.  Missing the due date means that a taxpayer has missed a filing requirement.  In sum, the Court stated:

Having considered and rejected the arguments advanced by Taxpayers and the Commissioner, we agree with the Fifth Circuit’s decision in McCoy that the plain and unambiguous language of § 523(a) excludes from the definition of “return” all late-filed tax forms, except those prepared with the assistance of the IRS under § 6020(a).

The ruling of the Court makes sense from a policy perspective as well.  If taxpayers simply file random forms out of time, without requesting extensions, then a burden would be placed on the IRS with regards to what is or is not a “return.”  The lesson here is clear, and has been said before:  always file your tax returns in a timely fashion, even if you cannot pay the tax.  Unexpected adverse consequences can happen when returns are not filed.

Read More:  Domestic Support And Child Support Obligations In Bankruptcy

A Lease Or A Secured Loan: Economic Realities Matter, Not Words

A common tactic of creditors in bankruptcy litigation is the attempt to characterize the nature of their debt in a way that is the most favorable for them.  It is almost a version of the philosopher Gottfried Leibniz’s old phrase “the best of all possible worlds”:  whatever characterization produces the most favorable outcome, that is generally what the creditor will choose.  We have seen, for example, loan contracts (drafted by creditors) that basically contain enough contract provisions that they can claim to be nearly anything:  a secured loans, a trust agreement, a purchase money security agreement, or a lease.

Such issues have arisen in the context of the issuance of money orders (a trust agreement or a security agreement?) by businesses or “floor plan” arrangements for used auto sales (is it a trust agreement or a secured loan?)  When such contracts are eventually brought before a court during litigation in an adversary proceeding or some other bankruptcy-related proceeding, a creditor may point to any number of various (and sometimes conflicting) contract provisions to try to claim that its debt is somehow “special.”

Not surprisingly, courts will often look past such verbiage to examine the actual nature of the transaction between the parties.  In bankruptcy court, it doesn’t matter what you call it, what matters is the underlying nature of the transaction.  This issue arose recently in a Kansas case in the context of a vehicle contract for the use of a debtor’s car.  The financing company claimed the arrangement was a lease.  The debtor (In Re James, case no. 12-23121, decided in the District of Kansas in November 2014) claimed the arrangement was a de facto secured loan.

Judge Robert Berger, who issued the decision, pointed to the Supreme Court case of Butner v. United States, 440 U.S. 48, 54-55 (1979) for the proposition that property right questions must generally focus on state law.  Following this logic, the Court focused on K.S.A. §84-1-103, which holds that the economic realities of a transaction must be the primary factors in interpreting its essence.  In other words, it doesn’t matter what a party calls something; what matters is the actual nature of the transaction (the “economic realities”) that matters.  Looking at the fine print of the contract, the Court noted that the “lease” agreement actually gave the debtors the option to become the owners of the goods for no additional consideration.

In addition, the vehicle contract did not give the debtors the option to terminate it, which is supposed to be one of the main features of a true “lease.”  Actually, there was a “cancellation” provision in the contract, but it required the debtors to pay the remaining balance due.  For this reason, the cancellation provision was a creditor ruse.  “Early termination” of the lease was an illusion.  Because the so-called “lease” gave the debtors no rational option but to continue making payments until completion of the contract, it was not a true “lease.”  The Court found it to be a security interest, and would treat it as such within the debtor’s Chapter 13 plan. Although the car loan could not be crammed down, the terms of the contract could still be modified somewhat in the Chapter 13 plan (interest rate lowered, different payment terms, etc.).

The James decision highlights a tactic frequently used by creditors:  fill a contract with fine print that has features of nearly any scenario that might arise.  As stated above, we have seen creditors attempt to characterize ordinary, garden-variety commercial loans as priority trust agreements (deserving special treatment), as statutory trusts, as security agreements, as leases, or as other things.  The tactic is also used frequently by payday loan establishments in possession of debtors’ checks.

It is becoming more and more common for large institutional creditors to take advantage of their size and unequal bargaining power to compel debtors to sign agreements that may not be what they appear to be.  The practice also is found in business situations and commercial loans.  Fortunately, the rule here is clear:  it doesn’t matter what a creditor says a contract is; what matters is what the economic realities of the transaction are.  If you have been saddled with a contract or agreement that a creditor claims to be one thing or another, it is critical to get independent legal advice.  Very often, you may have more rights than you think you have.

Read More:  Bankruptcy Debtors Can’t Be Discriminated Against

Doctor, Physician, And Dentist Bankruptcy Cases In Kansas City

The past few years have seen an increase in the number of bankruptcy cases filed for dentists and doctors.  The reasons are not difficult to comprehend.  As average household incomes decline in the economic environment currently existing, expenditures on health tend to decline as well.  All but the most necessary procedures are postponed or forgotten.  A concurrent rise in operating costs (insurance especially, but also in medication) contributes to the stress of operation.  Changing regulations, the confusion sown by new laws, and reduced payments from Medicare and Medicaid reimbursements have not helped matters.

In the United States, medical and dental care providers are essentially run as for-profit businesses.  Doctors, dentists, labs, hospitals, and clinics are also run as businesses in most situations.  Yet, like many professionals (accountants, attorneys, architects, engineers, etc.), physicians and dentists usually are not trained in school how to run or market a business.  At Phillips & Thomas, we have also represented physicians and dentists who have experienced very serious and unexpected events that have contributed to their business troubles.

Like all situations where small businesses are in distress, the most important thing is to take action quickly to address problem areas.  We have found, from our experience in representing professionals, that moving quickly to address debt and reorganization issues is absolutely critical.  Doctors and dentists face special issues that are not seen in other types of small business debtors.  A Chapter 11 filing can do the following:

  1. Stop certain actions of regulatory agencies that may be seeking to investigate or close down a practice
  2. Enable the debtor to break out of leases, contracts, or agreements that are weighing on the business
  3. Stop all creditor calls, harassment, or collection activity
  4. Enable a greatly-needed “breathing space” for the filing of a plan of reorganization
  5. Stop the actions of creditors who may be trying to repossess medical equipment or dental equipment
  6. Stop the actions of tax authorities who may be trying to file tax liens or garnishments for the alleged non-payment of sales tax, withholding tax, or income tax

The key thing is that the filing of a Chapter 11 reorganization will enable a dentist or doctor to continue to do what he or she loves, and also provide a way to continue to operate the business as a going concern.  In a Chapter 11 case, the debtor is a “debtor-in-possession” which means that he or she remains in charge of the operation of the business.  No one will step into your shoes and try to interfere with how you run your practice.  In a debtor-in-possession scenario, no trustee is appointed.  You, the owner of the business, retain the rights, duties, and obligations of a “trustee” in dealing with your property and operating the business.  Essentially, you become your own “trustee.” You can obtain new loans and new credit while you are in a bankruptcy.  You have the option of assuming, rejecting, or assigning leases or executory contracts that may exist.  Our list of articles on this website dealing with Chapter 11 is very detailed and wide-ranging, and can be found by clicking on the tab on the right side of the home page of this site, under “Chapter 11 Bankruptcy In Kansas City.”

From our experience, these are the typical issues that affect physicians and dentists:

  • Physical damage or problems with physical premises (fire, accident, etc.);
  • Student loan debts are generally much larger than the average debtor.  Interest rates can be changed, monthly payments can be changed, and if certain conditions are met, actions can be taken to seek the complete discharge of these debts.
  • Data loss from computer network crashes or file management issues that cause a drop in revenue;
  • Divorce or dissolution proceedings;
  • Increased operating costs (medications or supplies) that affect the bottom line;
  • Equipment issues (problems with dental equipment or physician equipment or action by a lienholder);
  • Dealing with the large and often collateralized (with business equipment) loans that are typically found in doctors’ or dentists’ offices;
  • With dentists or physicians, there can be ethical or professional conduct issues that can relate to client files and ethical obligations for ongoing patients;
  • Dealing with the state regulatory agencies or state licensing authorities.  State regulatory agencies and licensing bureaus typically do not have a sophisticated knowledge of bankruptcy reorganizations and a debtor’s rights under it.  In some cases, these regulatory agencies overreach or fail to understand a debtor’s rights.  It is important to have an attorney who knows how to deal with these agencies.  At Phillips & Thomas, we have experience in this area.

Bankruptcy reorganizations for doctors, medical clinics, health care providers, and dentists have special issues that are not found in other types of cases.  Depending on the goals and situation of the business or individual, it may be necessary to consider all of the relevant chapters of the Bankruptcy Code to see which chapter is appropriate for the situation (Chapter 7, 13, or 11).  Again, we can’t stress enough the importance of getting guidance and advice at the earliest stages of difficulty.

Read More:  About Phillips & Thomas LLC

Restaurant Bankruptcy and Food Supplier Bankruptcy In Kansas City

Small Business Bankruptcy Cases In Kansas City

With the downturn in the economy, more restaurants, food service businesses, and commodity suppliers and vendors (especially produce) are finding themselves with thin profit margins.  Restaurants and associated food service businesses are a big part of the local economy in the metropolitan Kansas City area.  We have found from our experience that business owners should know all of their legal options well before financial troubles begin to press upon them.  Running a restaurant is not easy even in the best of times, and we understand that.  Phillips & Thomas LLC has worked with restaurant and food services businesses for many years, and is very familiar with the issues and challenges facing them.

Circumstances can change very quickly in the restaurant and food service business.  The traffic of customers can evaporate or be diverted, suppliers can default on their obligations, tax issues can arise, employee problems can surface, ownership or managerial disputes can develop, or physical issues with the premises (fire, theft, damages) can happen.  All of these changes require a rational, realistic response that takes into account the goals of the business and the economic management of the problem.  We have stated this principle before in other articles on this blog, and we will repeat it again:  identifying and dealing with a problem quickly is vastly preferable to delay.  In most situations, one’s options are widest at the beginning of a problem; those options can get narrower the longer the issue is delayed.  Stated another way:  in the food service business, get help quickly as soon as bad things happen.  Communication is critical.

There are different types of bankruptcy options available to restaurants or food services businesses:  Chapter 7, Chapter 13, or Chapter 11.  Each of these options has its own merits, and is useful in different circumstances.  Chapter 7 cases are liquidation cases, in the sense that a business would be “wound up” under the control of a Chapter 7 trustee.  On the filing of a Chapter 7 case, the business premises would come under the control of the Trustee, who would then decide how to handle the inventory, equipment, and other issues.  The operation of a business by a Chapter 7 trustee is complicated and involves many “moving parts”:  dealing with landlords and leases, dealing with employees, dealing with customers or clients, and dealing with inventory and assets.  It is important to consult with an attorney to go through all of these issues.  Do not assume that you, the business owner, can diagnose or evaluate these issues yourself.

Chapter 13 cases can only be filed by individuals, but they are often filed in a business context where the individual is a sole proprietor, or has signed personally for the business’s debts and needs some way to reorganize those.  It also often happens that a business owner is saddled with payroll or withholding taxes from the operation of a business, and needs some way to deal with those as well.  Again, it is important to consult with an attorney to understand all the nuances and options available.

Chapter 11 cases can be filed by individuals or businesses for a variety of reasons.  Under Chapter 11, the affairs of the business can be reorganized (or liquidated, in some situations) in such a way as to allow the business to get back to a position of profitability.  We have a large number of articles on Chapter 11 cases here; if you go to the right side of your screen, you can click on the tab that says “Chapter 11 Bankruptcy”, and find numerous topics of relevance to Chapter 11 cases.

The Perishable Agricultural Commodities Act (PACA).

We do need to spend some time here talking about PACA.  Restaurant owners, food sellers, produce suppliers, commodity suppliers, and other vendors should be aware of the existence and implications of this federal law.  We have dealt PACA litigation in a variety of food service contexts, and can say that it is one of the most underappreciated and misunderstood issues that can arise in the context of restaurant and food service supplier bankruptcy cases.  What is PACA?  Over seventy years ago, Congress decided that sellers of farm products were at risk from buyers.  Buyers had the right to reject shipment of produce from sellers, and in declining price markets, often these rejections were done to get out of inconvenient contracts.  Sellers often had to spend a lot of money and travel great distances to try to sell their produce.  Since agricultural commodities are perishable and easily spoil, this was seriously hurting sellers.

In order to regulate this type of interstate commerce, then, Congress in 1930 passed the Perishable Agricultural Commodities Act (PACA).  The purpose of the law, as stated above, was to protect sellers from unscrupulous buyers.  The US Department of Agriculture had the right to intervene when a buyer failed to honor a promise to pay for commodities.  It also prevented brokers from making fraudulent charges, shippers from reneging on agreements, and a few other things.  PACA was amended in 1984 in a significant way.

The 1984 amendment to PACA provided for the creation of a “trust” for the “benefit of all unpaid suppliers or sellers of such commodities until full payment of the sums owning in connection with such transactions has been received…”  What happened, in effect, was that Congress created a new statutory remedy for the seller of perishable agricultural commodities to a possible debtor in bankruptcy.  Basically, a seller now became something much more than an ordinary unsecured creditor.  A trust was created by operation of law, and savvy sellers could now use this fact to argue for the creation of a “superpriority trust” within a bankruptcy case.

PACA litigation is complex.  At issue are often the following questions:

  • Does PACA even apply to the transaction in question?
  • What is the definition of a “perishable agricultural commodity”?
  • Is my restaurant covered under PACA?
  • Will I be held responsible for the creation and maintenance of a “trust”?
  • What is in a PACA trust?  That is, what constitutes its “res”?

The bottom line is that restaurant owners, food suppliers, vendors, and other parties in the commodity chain are often unaware of PACA and its implications.  The possible existence of a trust has important implications in a bankruptcy case, since the holder of an alleged trust may seek to file an adversary proceeding under 11 U.S.C. Sect. 523(a)(4) to have the debt declared non-dischargeable.  Alternatively, such a creditor may seek to claim super-priority status in any reorganization plan under Chapter 11 or 13.  If you are a restaurant owner or a dealer or handler of commodities in any way, please feel free to consult with us to discuss these issues.

Read More:  Real Estate Bankruptcy Cases In Kansas and Missouri

International Insolvency: Chapter 15 Cross-Border Bankruptcy Cases

Corporate Bankruptcy Firm In Kansas And Missouri

With the increasing interdependence of international trade, it is reasonable to expect that cross-border insolvency proceedings will become more common. It is not too difficult to imagine a time in the future when cases that span at least one international border become routine. According to federal law, a “foreign proceeding” means “judicial or administrative proceedings in a foreign country…under a law relating to insolvency or adjustment of a debt in which proceeding the [debtor’s assets and business] are subject to control or supervision by a foreign court for the purpose of reorganization or liquidation.” 11 U.S.C. §101(23). Obviously, such proceedings present many complex issues involving choice of law, locating of property, equal treatment of creditors, and various other issues.

The road in this area of the law has been a rocky one.  Some countries (e.g., Finland, Ireland, The Netherlands) historically have not recognized foreign bankruptcy proceedings at all. Other nations take a different approach, assuming that their own proceedings should have universal applicability while denying such treatment to other nations. In the United States, Chapter 15 of the Bankruptcy Code deals with foreign bankruptcy proceedings. Chapter 15 was only recently added to the Bankruptcy Code (in 2005) with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of that year. Chapter 15 allows proceedings for a foreign debtor to access U.S. Bankruptcy Courts. It was intended to modernize and harmonize the law of cross-border bankruptcy proceedings. Chapter 15 cases have been filed for various purposes:

  • To protect the assets of a foreign creditor that may be located in the United States from actions by creditors;
  • To establish orderly procedures for U.S. creditors to follow in the filing of claims actions against foreign creditors;
  • To bind creditors to the terms of a restructuring plan that may have been created in a foreign jurisdiction;
  • To facilitate asset sales or liquidations that may have originally arisen in a foreign proceeding;
  • To permit a foreign debtor to use the cash collateral of its big creditors in the U.S.;
  • To permit discovery of parties subject to U.S. Bankruptcy Court jurisdiction

Chapter 15 cases are rather unique. Debtors under Chapter 15 have a great deal of power. The filing of proofs of claims is fundamentally different from the other chapters of the Bankruptcy Code. The foreign debtor’s representative in the U.S. has many powers similar to those of a debtor in possession under Chapter 11. They may examine witnesses, sell assets, and operate the business affairs. However, they typically are restricted in undertaking avoidance actions, such as fraudulent conveyances. In addition, it is well to note that relief under Chapter 15 is limited under Section 1506 of the Bankruptcy Code. Under this section, a U.S. bankruptcy court may decide against taking action that would be “manifestly contrary to the public policy of this country.”

The trend is this area of the law is clearly towards greater internationalization and universality. A recent case from the Southern District of New York is illustrative. The case is In Re Rede Energia, S.A (14-10078, SCC). The company, Rede Energia, SA, was a Brazilian business that had a plan of reorganization that had been filed and confirmed in Brazil. At issue was the question of how (and to what extent) would Rede Energia’s reorganization plan would be recognized in the United States. Rede Energia (the debtor) was a major power company in Brazil. Its foreign administrator in the US commenced a Chapter 15 proceeding in New York. The debtor’s plan had been “crammed down” in Brazil over the objections of some creditors. The debtor sought an order from the New York bankruptcy court that would give “full faith and credit” to the Brazilian confirmed plan of reorganization.

Some of Rede’s unhappy creditors in New York argued that, under Section 1506 of the U.S. Bankruptcy Code, the Brazilian plan of reorganization was clearly violative of U.S. public policy. (Specifically, the creditors complained that the plan had three classes of unsecured creditors, which were being treated differently). But the New York bankruptcy court ruled otherwise, in a decision that will be an important precedent as these types of cases become more and more common. Under Chapter 15, the court stated, there is no requirement that the laws of a foreign nation (e.g., Brazil) be identical to those of the U.S. Rather, the issue was whether the creditors received a reasonable degree of due process and fairness in the original proceeding.

Looking at the issue this way, the New York court found that the objecting creditors in New York did in fact receive a full and fair hearing on all of their issues during the legal proceedings in Brazil. They could not now reopen these issues. Furthermore, the court held, it would not be appropriate for a U.S. court to “superimpose” its own law over those of a foreign country. Finality, and a sort of “cross-border res judicata”, were key factors in the decision. The New York court was similarly unpersuaded by the creditors’ argument that treating differently the three classes of unsecured creditors was a big problem.

On the contrary, the court noted that it does sometimes happen in bankruptcy reorganizations that similarly situated creditors are treated differently. This is so despite the fact that the Bankruptcy Code aspires to similar treatment of similarly situated creditors. Every plan of reorganization is different. Taken as a whole the Rede Energia case stands for the idea that the principles of res judicata, due process, and fairness are universal and will be given international application in Chapter 15 cross-border insolvency cases.

Read More:  Bankruptcy Appeals And The Appellate Process

Real Estate Chapter 11 Bankruptcy Cases In Kansas And Missouri

Real Estate Reorganization Through Chapter 11

Within the Chapter 11 world, a common and powerful type of Chapter 11 reorganization case is the “real estate reorganization” Chapter 11 case. These types of cases are filed by real estate management companies, by individuals who own residential or commercial real estate, by holders of “single asset” real estate projects or properties, or by entities or persons who have ownership interests in real estate. A person or business does not even need to be insolvent in order to file a case.  We will discuss here some of the typical features of a real estate reorganization. It is important to note at the outset that every case is different and presents its own issues. Long experience with these types of cases have enabled us to formulate some general principles and outlines.

The major advantages of the real estate Chapter 11 case is that it gives the debtor (whether an individual or a business) the ability to change the terms of the original loans. As a debtor-in-possession, the debtor stays in charge of everything and continues to operate as the business owner. Interest rates, monthly payments, and terms of loans can be (and are) drastically altered to enable the debtor to get relief from onerous mortgage or lease terms. Properties can be sold, liens can be stripped off, and loans can even be “crammed down” to the value of a piece of real estate. Regarding “cramdown”, we can say that this is one of the most powerful features of Chapter 11 practice. It provides that a Chapter 11 plan can be confirmed by a court even when there is an objection or disagreement from one or more creditors.

If a property is “underwater”, a cramdown allows a debtor to modify drastically a mortgage loan under certain conditions. Under Section 506 of the Bankruptcy Code, a lien is secured only to the extent that there is value in the property. If the mortgage exceeds the value, the unsecured portion of the loan is “crammed down” to the value of the collateral. In order for this to happen, certain requirements must be met by the filed Chapter 11 plan and with the voting among the classes of creditors. The plan must also not be unfairly discriminatory against the dissenting class of creditors. Because these requirements are somewhat vague and open to much interpretation, it is important to have an experienced attorney handle a real estate Chapter 11 case.

In a typical real estate Chapter 11 case, the case will be filed at a time when the debtor is already behind or expected to be behind on one or more mortgage payments. When the petition is filed, the debtor normally seeks a court order to use the “cash collateral” of the business. Frequently, rent collected by a debtor will be subject to such a cash collateral order. Within 120 days, a debtor will generally decide whether to assume, assign, or reject any leases or executory contract he or she may have with other parties. It no intention is declared, the lease is assumed to be rejected. Courts can extend the period of time for assumption, assignment, or rejection for an additional period of 90 days, if needed.

A debtor may assign a lease, even if the lease had a term against this, if adequate assurances of future performance are made. There are some additional nuances if the real estate involved is a shopping center. There should be adequate assurances of sources of rent and financial condition of assignee; the percentage of rent due should not decline substantially; and assumption or assignment should not destroy the balanced tenant mix in the shopping center. There are also rent caps on claims against debtors, which limit a landlord’s possible claim for a rejection of a lease.

Within 120 days of the filing of a case, the debtor must file a disclosure statement and plan of reorganization. The disclosure statement contains information about the debtor’s assets, liabilities, and financial projections. It is designed to enable a creditor to know more about the debtor’s overall picture. A plan is also filed, and sent to the creditors along with a voting ballot. If there are enough votes in favor of the plan, and it meets the confirmation requirements of the Code, it will be confirmed. Even if it does not, the court may still confirm the plan over the objections of the creditors.

In a cramdown scenario, a real estate mortgage is restructured where the loan balance is reduced to the fair market value of the collateral, and the interest rate is changed. Cramdowns can occur in three ways: (1) the lien is retained and the creditor receives the amount of the claim, and have a value equal to the allowed secured claim; (2) the debtor sells the encumbered property free and clear of all liens, and the creditor receives in cash the allowed amount of the secured claim; or (3) the lender gets some equivalent of the preceding two claims. In cramdown scenarios, at least one class of impaired creditors must vote in favor of the plan.

In certain situations, it is to a debtor’s advantage to sell some real estate in the Chapter 11 process. This is called a “Section 363” sale. We have written about the details of such sales elsewhere in this blog.  The link at the end of this article is one such example.  Additionally, you can click here for more information. 

The Single Asset Real Estate (SARE) Chapter 11 Case

There is a special type of real estate Chapter 11 case that is meant for single properties or single real estate projects. A “single asset real estate” is defined in 11 U.S.C. §101(51B). It is a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor (who is not a family farmer). In some situations, a debtor will be behind on a real estate loan for business real estate (e.g., investment property, warehouse, developments, office building, etc.). The filing of a SARE case can be a powerful help, as it can strip away any liens that are greater than the property’s fair market value.

With SARE cases, the automatic stay has different parameters than in a regular Chapter 11 real estate case. In a SARE case, a debtor should file a plan of reorganization or begin payments either within 90 days after the filing of the case, or within 30 days from the time the bankruptcy court determines that the debtor is subject to SARE guidelines. If this does not happen, the automatic stay may expire. There are many situations where it is unclear whether a Chapter 11 case is a SARE case. In these situations, it may be of use for a debtor to file a motion seeking a determination on this issue.

Real estate cases are complicated and present special issues. If you are an owner or an investor in real estate, and are seeking relief from financial issues, it is critical to explore what a Chapter 11 real estate case has to offer. You may be surprised to discover just how powerful the Chapter 11 process is in helping you to operate your real estate business as a going concern, and resolve issues with other creditors as well.

Read More:  Buying And Selling Assets In A Chapter 11 Case