Monthly Archives: October 2014

Doctor, Physician, And Dentist Bankruptcy Cases In Kansas City

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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.

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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.

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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 Service Bankruptcy In Kansas City

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Restaurants and associated food service businesses are a big part of the local economy in the metropolitan Kansas City area.  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. 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.

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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

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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.

Phillips & Thomas is one of the few firms in the metro area that has been involved in a Chapter 15 international insolvency proceeding.  Our managing partner George Thomas speaks Portuguese and travels to Brazil frequently.

Read More:  Bankruptcy Appeals And The Appellate Process

Real Estate Chapter 11 Bankruptcy Cases In Kansas And Missouri

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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.

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Kansas City Missouri Municipal Court: An Overview

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The Kansas City Municipal Division is part of Judicial Circuit 16.  The courthouse is located at 1101 Locust, Kansas City MO  64106.  It hears misdemeanors, infractions, and even housing code violations cases that arise out of incidents alleged to have occurred in the metropolitan Kansas City Missouri area.  It has eleven courts that deal with such cases, and the courts are indicated by letter (Courtroom A through K).  Persons who have received a citation or a summons to the the KCMO Municipal Court should look at their documentation carefully to make sure that they know when and where their court date is.  If you do not have your paperwork, your attorney can find this information out for you.

It is important to have an attorney when dealing with issues in KCMO Municipal Court.  Too often, people make the mistake of not doing this, and then find out later that big problems have been created.  In addition, having and attorney can do the following for you:  (1) Work on withdrawing active warrants and getting you a court date; (2) Changing the time and date of your current court date.  For many people, having these things done is an important part of the preliminary matters surrounding a case.  Under the “add on” system, and depending on the nature of the case, your attorney can often resolve your issue without you having to be there in court.

The Municipal Court should not be confused with the Jackson County Circuit Court itself, which is located near the Municipal Court but hears different types of cases.

Read More:  Overland Park Municipal Court:  An Overview

Confirmation Of A Chapter 13 Plan: The Effects

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One of the major goals of the Chapter 13 debtor is the confirmation of the plan proposed to the Court and to the creditors.  The plan, until it is actually confirmed by Court order, has no formal legal effect.  The plan’s provisions must be found to comply with Bankruptcy Code §1322 and meet the other confirmation standards laid out in §1325.  The creditors and the Chapter 13 trustee will have had the opportunity to review the plan and file any objections they wish to file.  Once the plan is actually confirmed by a confirmation order, three effects come into play.

First, the provisions of the plan become binding on all the parties (debtor and creditors) pursuant to §1327(a). This is referred to as the “res judicata” effect of confirmation.  As one judicial ruling said, once a plan is confirmed, it becomes binding on the parties, “warts and all.”  This means that the confirmed plan has binding legal effect even if it happens to contain provisions that conflict with the Bankruptcy Code (there are some limitations on this rule; and a debtor cannot push it too far.  Some things cannot be achieved by plan confirmation and must be separately litigated).  The plan is still subject to postconfirmation modification in accordance with §1329.  Furthermore, the Court does have the power to revoke a fraudulent confirmation under §1330(a).

Second, under §1327(b), the confirmation of a plan vests the property of the estate in the debtor unless the plan or confirmation order says otherwise. The Chapter 13 Trustee is not a liquidating trustee, unlike a Chapter 7 trustee.  The extent to which the property of the estate vests in the debtor is an important issue when dealing with the issue of the postconfirmation application of the automatic stay under §362(a).  Issues can also arise regarding the status of the debtor’s postconfirmation earnings or property that the acquires after confirmation.

Third, under §1327(c), property that vests in the debtor is held free and clear of any claim or interest of any creditor provided for by the plan, unless the plan or confirmation order says differently. If the plan modifies a secured claim, it must provide for the creditor to retain its lien until the value of the secured portion of the claim has been paid and the debtor has received a discharge.

Once the confirmation order is entered, the Chapter 13 Trustee begins to disburse funds paid by the debtor under the plan to the creditors in accordance with the plan provisions.  There is usually a significant amount of money available to do this, since the debtor will have been making payments since the filing of the case, and these payments will have been held in trust by the trustee.  Once the debtor has finished making the payments provided for under the plan, the debtor will be discharged for personal liability on all the debts (with some limited exceptions).  If this payments are not completed under the plan, it may be converted to another chapter of the Bankruptcy Code (Chapter 7) or dismissed.  If a case is converted or dismissed, a secured creditor retains its lien to secure the unpaid amount of the secured debt, regardless of the valuation of the encumbered property under the plan.

The binding effect of the plan’s terms requires creditors to apply payments in accordance with the plan, and limits their rights with regard to prepetition defaults.  If the plan modifies a secured claim through a “cramdown” or otherwise, the plan’s provisions state the terms for the satisfaction of the claim and any lien that may secure the property.  The plan is also binding on the debtor as well.  Essentially, the court views a Chapter 13 plan as a new contract among the parties, and that this new contract replaces the old agreements.  The doctrine of “claim preclusion” or res judicata applies.  This doctrine of claim preclusion has even been interpreted by courts to prevent later adjudication of many different matters, including an objection to a proof of claim.

However, the creditor must have received notice of the plan and it must have had a chance to assert its due process rights.  Due process is satisfied as long as the creditor has received adequate notice.  It is in the best interests of debtors, of course, to draft plans carefully, so that the desired treatment of each claim or class of creditors is specifically detailed.  Creditors, for their part, should review the plan carefully and address any issues that they may see contained therein.  No matter how carefully the language is crafted, there will occasionally be disputes of interpretation and importance, and these disputes will continue to fuel much Chapter 13 litigation.

Read More:  Adding Unscheduled Assets To A Bankruptcy Case

Recoupment Of Benefit Overpayment Did Not Violate Bankruptcy Automatic Stay: A Recent Kansas Decision

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A recent ruling by a bankruptcy judge in Kansas City demonstrated the interplay of a contractually-derived “right of recoupment” in a bankruptcy setting. It is an issue we have written about in this blog before. On March 16, 2014, here on our blog, in an article on overpayments of Social Security Disability payments we discussed the circumstances under which such overpayments were dischargeable in bankruptcy. (You can click here to see it).  We stated the following:

Recoupment is a common law doctrine. It is basically an equitable exception to the automatic stay of bankruptcy. It is “the setting up of a demand arising from the same transaction as the plaintiff’s claim or cause of action, strictly for the purpose of abatement or reduction of such claim.” In Re Caldwell, 350 B.R. 182 (E.D. Penn. 2006); see also In Re Mewborn, 367 B.R. 529 (D. N.J. 2006). Recoupment “does not require a mutuality of obligation, but rather countervailing claims or demands arising out of the same transaction under which the initial claim was asserted.” In Re Hiler, 99 B.R. 238, 241 (Bankr. N.J. 1989). See also In Re Irby, 359 B.R. 859 (Bankr. N.D. Ohio 2007). The key phrase here “arising out of the same transaction.”  Both the Hiler and the Caldwell courts stressed that a debtor must accept the burdens of a contract if he wants to continue to receive benefits under it. If overpayments are made under a contract which provides for recoupment prior to the filing of a bankruptcy petition, the debtor should not be allowed to avoid the reimbursement of money by having them discharged in a bankruptcy while at the same time he continues to receive the benefits under the same contract. A debtor, basically, cannot assume part of an agreement and reject another. Recoupment allows for offsetting the amount a person owes from the ongoing benefit received.

Basically, the point we were trying to make is that there are situations in bankruptcy where contract-based overpayments can continue to be collected by a creditor. These situations do not often arise, but they do exist. Judge Somers, in the Kansas City Division of the US Bankruptcy Court for the District of Kansas, made this point emphatically in a ruling issued October 6, 2014. The case was In Re Amelia Rock.

In this case, the debtor had become disabled in 2010 and was receiving long-term disability payments under a plan sponsored by the Kansas Public Employees Retirement System (KPERS). It was a contractually-based plan, which gave the plan administrator the right to recoup overpayments. The plan administrator did just that in 2011, and set up a “recoupment” when it found out that the debtor had received a large payment from a collateral source (workers’ compensation). The plan administrator (called “UHCSB”) reduced the debtor’s future disability payments by $100 per month in order to recoup the alleged workers’ comp overpayment.

The debtor filed a Chapter 13 bankruptcy in 2013, and assumed that the automatic stay imposed after the filing of the case would require UHCSB to terminate its recoupment debit of the debtor’s disability payments. Such language was included in the plan, and the plan was confirmed. The creditor, UHCSB, received notice of the plan and apparently did not object to it. The creditor continued to withhold the money from the debtor. The debtor then filed a motion to compel turnover of the withheld money, for sanctions for violations of the automatic stay, and for costs and expenses. The creditor actually did agree to stop the withholding, refund the money taken, and waive the remaining balance owed. The only remaining issue was that of the debtor’s litigation expenses, and this required the court to determine if the creditor had violated the automatic stay.

The court ruled that precedent in the Tenth Circuit showed that the creditor was not required to get relief from the automatic stay before continuing to withhold the $100 from the debtor’s monthly benefit payment. “Recoupment originated as an equitable rule of joinder, allowing adjudication in one suit of two claims that the common law had required to be brought separately.” The relevant test is whether the debtor’s obligation to repay arises out of the “same transaction” as the right to receive the continuing disability payments. Essentially, equity is the controlling issue.

A debtor should not be able to continue to receive benefits, as well as an overpayment, since such an outcome would amount to cherry-picking favorable terms out of one contract, while avoiding others. The court relied heavily on In Re Beaumont, 586 F.3d 776 (10th Cir. 2009) in arriving at its decision. Thus, ruled the court, there was no violation of the automatic stay, and therefore the debtor was not entitled to its litigation costs.

It should be stressed here that the “recoupment” doctrine only applies in certain situations.  As we noted in our earlier article on Social Security Benefits overpayment, not every benefit is contractually-based.  So, presumably, the outcome here would have been different if the benefit had been one of a different type.  Each case is different, and each situation needs to be examined on its own merits.

Read More:  Bankruptcy Debtors Can’t Be Discriminated Against

Leases In Chapter 7 Business Cases In Kansas And Missouri

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Overland Park Business Bankruptcy Attorney

The legal issues surrounding leases in bankruptcy cases can depend on what type of bankruptcy is being talked about. Chapters 7, 13, and 11 each have separate rules and procedures with regard to leases. In a Chapter 7 case, the bankruptcy trustee has the option of assuming the debtor’s interest in the lease or curing any default under it. In practice, this only happens on rare occasions with commercial leases (not residential leases). Chapter 7 trustees almost never bother with residential leases, since they provide no value to the estate. In commercial lease situations where the rent provided under the lease is significantly below the market rate, or where the premises have some sort of value to the estate in a business liquidation, this type of thing is possible in theory.

In a Chapter 7 business liquidation, the trustee has the right to commandeer the premises and use them for storage or for a bankruptcy sale. Here again, this rarely happens. Even in a liquidation, it often happens that by the time the case is filed, there is little value to the estate that can be had by operating the business. In situations where Chapter 11 cases are converted to Chapter 7, or where the business has a large amount of liquidation value, this can change. When the bankruptcy petition is filed, the landlord is prevented by the automatic stay from attempting to enter the premises and repossess the inventory or equipment on the premises, even if the rent has not been paid and a state court has ordered the debtor to be evicted.

The Chapter 7 trustee can use the leased premises to store the property until it can be sold, if it has significant value for the estate. If the trustee does not assume the lease of the business, and uses the premises for storage, it may not be easy for the landlord to collect rent from the trustee. The trustee typically claims that the estate is only liable for a lower amount, or only for the period in which the trustee was actually in possession. And if there is not enough funds in the estate to pay for the expenses of administration, then the amount might not be paid. Landlords and their attorneys are often unfamiliar with the nuances of bankruptcy law and their rights under it.

They may be unpleasantly surprised to find out that their statutory landlord lien is invalid in bankruptcy. Rent arrearages that may exist at the time of the filing of the case might get treated as a general unsecured claim in the estate, which usually amounts to very little in recovery.  A landlord subject to the automatic stay by the filing of a bankruptcy case cannot simply ignore it. This is true regardless whether he has received notice from the court. One of the basic purposes behind the automatic stay with regard to leases in Chapter 7 is to permit the trustee time to assess the condition of the premises and any property in it. Generally the trustee has 120 days to assume or reject a lease of nonresidential real property. The court can extend this for another 90 days if needed.

In business liquidation cases where a lease is involved, it is not always a simple matter for a landlord to collect rent during the time the trustee is in possession of the premises. In situations of nonresidential real property, the trustee has an obligation to “timely perform all the obligations of the debtor” arising under the lease, until the lease is assumed or rejected. In Re Cukierman, 265 F.3d 846 (9th Cir 2001). If the lease has significant value, it is even possible that the trustee may assume and the possibly assign or sell it. Before it can be assumed, he would have to cure any default under it, and compensate the landlord for any damages suffered by the breach of the lease.

If the property continues to be used by the trustee after the filing of the bankruptcy, it is possible that the landlord can request compensation under Section 503(b) of the Bankruptcy Code (administrative expense). The landlord would be entitled to the “reasonable value” of the use of the premises. This is not necessarily the rent amount specified in the lease agreement; in fact, it may be significantly less than this. And even if the estate can afford to pay the landlord administrative rent, claims will be based on the actual value received by the estate, not on the value that was lost by the landlord. However, the landlord may be entitled to “adequate protection” payments during the pendency of the case. As can be seen from this discussion, a landlord’s attorney will need to be aggressive and persistent if he wishes to recover anything for his client from the Chapter 7 trustee once a business liquidation is filed.

Read More:  Assigning An Executory Contract In A Chapter 11 Business Bankruptcy

Bank And Banking Crimes In Kansas And Missouri

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Bank and banking crimes are dealt with under a variety of federal criminal statutes. We will discuss some of the major ones here.

Embezzlement and Misapplication (18 U.S.C. §§656 and 657). These two statutes are nearly the same, except that Sect. 656 deals with banks and Sect. 657 with credit unions and savings and loan associations. Under Sect. 657, an officer or employee of the institution may not “knowingly and willfully embezzle and misapply monies and funds” of the institution. There must also be an intent to injure and defraud the institution. Embezzlement and misapplication are separate offenses: the difference is that for embezzlement, the defendant must first have lawful possession of the funds alleged to have been appropriated for his own use. The statute is limited to acts done within a person’s official capacity, unless he or she used his position to harm the bank.

Generally, to act with intent to defraud usually means to cheat, deceive, or mislead, for the purpose of causing a financial loss to someone else. The defendant must have knowledge of what he or she is doing, rather than being merely careless or reckless. However, since direct proof of fraud is often not always available, an intent may be discerned from the facts and circumstances surrounding the loss of money. “Misapplication” is intended to cover situations where bank examiners are deceived. Another statute (18 U.S.C. §371 (bank conspiracy)) is often used with the offense of misapplication. Some examples of misapplication can be the following: bad loans, dummy loans, brokered loans, bond swapping, check kiting, collusion with loan officers in approving loans, manipulation of lending limits, and compensating balances. The defense of “good faith” is often used as a defense to embezzlement or misapplication, as it tends to defeat an accusation of an intent to defraud.

False Entries (18 U.S.C. §1105 and §1106). These sections prohibit bank insiders from making false entries in the records of a federally insured banking institution with the intent to injure or defraud the bank. The false entry should be over a material matter, not an inconsequential one. Here again there needs to be an intent to injure or defraud; that is, it is a specific intent crime. Defenses to this crime include accurate reporting, the fact that the false entry may have been immaterial or de minimis, or the fact that the reporting may have been ambiguous.

False Financial Statements (18 U.S.C. §1014). This section prohibits someone from making a false statement to a federal insured banking institution for the purpose of obtaining a loan or other extension of credit. It is generally intended to apply to situations where loan applications are falsified or materially false. Under this section, a person may not knowingly make a false statement or report, or overvalue any land, property, or security, for the purpose of influencing the decisions of a banking institution. The representations may not be implied representations; they must be true or false on their face. U.S. v. Kurlemann, 736 F.3d 438 (6th Cir. 2013). A defendant can generally prevail if he can show that what he or she said was the “literal truth.” U.S. v. Sarno, 73 F.3d 1470 (9th Cir. 1995). Normally, the government need not demonstrate that the insured institution actually relied on the fraud (note how this seems to be a lower standard than the civil standard of “reliance” for nondischargeability actions in bankruptcy court).

Fraud. (18 U.S.C. §1344). Bank fraud is knowingly executing or attempting to execute a scheme to defraud a financial institution. There is a split of authority in the federal circuits as to the details of the “knowledge” requirement. The Eleventh and Fifth Circuits require specific intent; the Second Circuit requires proof of intent to harm, but permits intent to be inferred; the Fourth and Seventh Circuits hold that a scheme or willful conduct is sufficient to show intent to defraud. The victim of the alleged fraud must be a federally insured institution. Good faith is also a defense. Section 1344 covers a wide variety of situations where fraud can be found: ATM (teller machine) misuse, false representations to banks, forgery, stolen checks, credit card fraud, mortgage fraud, and false statements to induce check cashing have all been found to fall under Section 1344.

Bribery (18 U.S.C. §215). A person may not give or promise anything of value to an officer of a financial institution with the intent to corruptly influence or reward that person. Similarly, under Section 215(a)(2), a banker cannot solicit or demand anything of value with the intent of being influenced in his capacity in the bank.

Read More:  Bankruptcy Crimes And Defenses