Distressed homeowners in Kansas and Missouri should be aware that there are major differences in how the foreclosure process operates in their respective states. The procedures and processes are very different. We will sketch the general outlines here of how things works in both states.
The official bankruptcy forms and schedules underwent significant changes to their appearance, layout, and presentation on December 1, 2015. It was one of the most important overhauls of the forms in their history.
What does this mean for you? Or does it make any difference at all? We will explore some of the answers here.
You want your case to be a success, and we want your case to be a success. And to ensure that this happens, I wanted to go over some tips and pointers that experience has shown to be some of the best ways to make sure that success happens.
I’ll start with the pre-bankruptcy phase of things, then talk about things to be aware of during the case. And then I’ll talk about things to be mindful of after your case. OK?
All right. Here we go.
What Are Health Savings Accounts (HSAs)?
Health savings accounts (HSAs) have gained some popularity in recent years. The idea is that a person can deposit money in an account and receive tax benefits for doing so. The funds can then be used for the payment of medical expenses when and where needed. The idea seems to be a good one, but it is not without potential pitfalls.
When a bankruptcy case is filed, however, unused money sitting in a health savings account may not be exempt. A recent case from the Eighth Circuit Bankruptcy Appellate Panel (BAP) considered whether certain funds held in a “health savings account” (HSA) could be exempted in a bankruptcy case. The case was In Re Leitch, BAP No. 13-6009, from 2013.
Life can take unexpected twists and turns. We can have all sorts of problems. Some of them are medical problems. Some of them are accounting problems. Some of them are family or relationship problems.
And some of them are legal problems.
But we don’t often find many step-by-step guides on how to solve legal problems. Why is this? Well, there are a lot of reasons: not diagnosing the problem, being misled by the media, or not acting fast enough.
Can an IRA (individual retirement account) inherited from a relative be exempted by a debtor in bankruptcy? No, says a recent Kansas bankruptcy judge’s decision. The case was In Re Mosby (14-22981), decided in June 2015 by Judge Dale Somers. The facts were interesting.
The debtor filed a voluntary petition under Chapter 7 on December 29, 2014. The debtor claimed Jackson Life IRA valued at $15,015.50 as exempt under various Kansas statutes, including K.S.A. 60-2308, 60-2308(b), and 60-2313(a)(1).
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.
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:
- Stop certain actions of regulatory agencies that may be seeking to investigate or close down a practice
- Enable the debtor to break out of leases, contracts, or agreements that are weighing on the business
- Stop all creditor calls, harassment, or collection activity
- Enable a greatly-needed “breathing space” for the filing of a plan of reorganization
- Stop the actions of creditors who may be trying to repossess medical equipment or dental equipment
- 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
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
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.