Category Archives: Bankruptcy Attorney Kansas City

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

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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

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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

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

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

Bankruptcy Appeals And The Appellate Process In Kansas And Missouri

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Johnson County Kansas Bankruptcy Lawyers

Under Section 158 of the Bankruptcy Code, appeals of bankruptcy court orders can be heard when the order if final, or when the order is “interlocutory” (with the leave of the District Court). In deciding when an order is final, courts take a realistic and pragmatic approach. Under Section 158(a)(3), an appeal from an interlocutory order can be heard only with leave of the court. Under this section, the district court or the bankruptcy appellate panel (BAP) can hear an appeal from an interlocutory order (a circuit court of appeals’ jurisdiction is limited to final orders). Thus, under F.R. Bankr. P. 8001(b) and 8003(a), an appellant must file a notice of appeal under Rule 8002, and also file a motion for leave to appeal.

Bankruptcy appeals can technically be heard in three possible forums: the local district court, the BAP of the circuit, or to the circuit’s court of appeals in some situations. As a practical matter, most bankruptcy attorneys will find themselves raising issues of bankruptcy law before the BAP, which operates in both the Eight Circuit (Missouri) and the Tenth Circuit (Kansas). This is so because the issues raised in bankruptcy cases are often complex and specialized, and the BAP is specifically designed to be a forum for bankruptcy appellate law.  US District Court judges may not have had as much exposure to the issues presented.

The 2005 amendments to the Bankruptcy Code created a limited ability to appeal matters directly to the circuit courts. This would be in situations where there is no controlling authority on legal issues involved, or where the issue requires the resolution of conflicting decisions, or where an immediate appeal “may materially advance the progress of the case or proceeding.” 28 U.S.C. Section 158(d)(2).

The deadlines are given in F.R. Bankr. P. 8002. The deadline for filing the notice of appeal can be extended in situations of “excusable neglect”, but this should never be relied on. Pushing the envelope is never a good idea in dealing with deadline issues. In determining what is “excusable neglect”, a court will look at the danger of prejudice to a debtor, the length of the delay and any potential impact on judicial proceedings, the reason for the delay, and whether the movant is acting in good faith.

Perfecting an appeal requires that certain other steps be made. The issues to be presented on appeal must be stated, and the record must be identified that the appeals court is supposed to review. Under F.R. Bankr. P. 8006, the following things are part of the record of appeal:

  • Items designated by the parties
  • The notice of appeal
  • The order, judgment, or decree that is the subject of the appeal
  • Opinions, findings of fact, and conclusions of law by the court

The parties then wait for the appeal record to be docketed. The appeals brief is then filed. From past experience, we have found that calling the BAP court clerks with questions is a very pleasant experience. The lack of crowded dockets gives them the ability to become personally acquainted with many cases, and makes for productive communication.
In reviewing an order, judgment, or decree from the bankruptcy court, the appellate court reviews the legal issues de novo, the factual findings for “clear error”, and its exercise of discretion for “abuse.” In Re United Healthcare Systems Inc. 396 F.3d 247 (3rd Cir. 2005). If there are mixed questions of law and fact, the appellate court will defer to the bankruptcy court’s finding of facts unless those are “clearly erroneous.” Frivolous appeals are very rare, but may possibly be found when the “overwhelming weight of precedent is against [appellant’s] position, where appellant can set forth no facts to support its position, or where, in short, there is simply no legitimate basis for pursing an appeal. In Re Alta Gold Co., 236 Fed. Appx. 267 (9th Cir 2007).

Under F.R. Bankr. 8005, there is a mechanism for getting a stay of an order pending the outcome of an appeal. Appellants will want to do this to preserve their position. Requests for stays pending an appeal must ordinarily be made to the bankruptcy judge. The court then has the discretion to grant a stay pending the appeal. A party seeking a stay pending the appeal is asked to show:

  • It is likely to prevail on the merits of its appeal
  • It will suffer harm unless a stay is granted
  • A stay will not substantially harm other interested parties
  • A stay is not harmful to the public interest

All of these conditions need to be met. Once the appeal has been docketed and scheduled, the litigants appear before the BAP judges and make their arguments, relying on the points raised in briefs.

Read More:  Confidentiality Orders And Sealing Records In Bankruptcy Court

Landlords, Tenants, And Leases In Chapter 13 Bankruptcy In Kansas City

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Overland Park Bankruptcy Law Firm

When a debtor files a Chapter 13 bankruptcy, the automatic stay under Section 362 bars the lessor (landlord) from “any act to obtain possession of property of the estate or of property from the estate” except through the bankruptcy court. A debtor who remains in possession of leased property will be expected to continue to pay the rent for such property. But there can arise many legal issues regarding when the rent is payable, what priority it has in relation to other debts, the measure of the rent, and the collectability of any past rent due.

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Interest Rates In Chapter 11 And Chapter 13 Cramdowns

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“Cramdown” is a term of art used to describe a situation in a Chapter 13 or Chapter 11 bankruptcy in which a secured creditor is being paid to the fair market value of the collateral secured by its claim, rather than the full loan balance. In a Chapter 11 plan, if the plan proposes to pay the secured claim in deferred cash payments, those payments would include post-confirmation interest at the “market rate.”

The market rate is a rate that the bankruptcy court considers fair in light of current market factors. In Re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990); Till vs. SCS Credit Corp., 541 U.S. 465, 476 n. 14 (2004).

In the case of In Re American Homepatient, Inc., 420 F.3d 559 (6th Cir. 2005), the court determined that the Chapter 11 cram down interest rate should be market rate where there exists an efficient market; if a market does not exist, then a court should employ the “formula approach” described by the Till case for Chapter 13 cases.

Under this “formula approach”, the interest rate is set as the national prime rate adjusted to reflect risk posed by the debtor. Of course, secured creditors in a Chapter 11 or Chapter 13 case are never really going to be satisfied with this “market rate.” Several methods have been advanced by courts in determining how this “market rate” should be determined. We will describe each of these approaches.

Formula Approach. Under the so-called formula approach, as stated above, the court begins with a base rate (such as prime rate) and then adds points for “risks” posed by the debtor. The formula approach was adopted by the Second Circuit in In re Valenti, 105 F.3d 55, 64 (2nd Cir. 1997) and by the Tenth Circuit in In re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990).

Cost of Funds Approach. Under this method, the rate is determined based on what interest the creditor would have to pay to borrow the funds. This approach is apparently not favored and has not been formally adopted by any circuits.

Coerced Loan Approach. There are two variations of the “coerced loan approach.” One variation is that the cram down interest rate is set as the same as the creditor would receive if it could foreclose and reinvest the proceeds in loans of equivalent duration and risk. Koopmans v. Farm Credit Servs., 102 F.3d 874, 875 (7th Cir. 1996). Another permutation on this approach is to examine the rate that the debtor would pay outside of bankruptcy to obtain a loan on terms comparable to those proposed in the Chapter 11 plan.

Presumptive Contract Rate Approach. Under this approach, the court begins with the pre-bankruptcy contract rate. This rate then creates a rebuttable presumption that either the creditor or the debtor can counter by persuasive evidence that the current rate should be different. In re Smithwick, 121 F.3d 211, 214 (5th Cir. 1997).

What is the guiding principle behind all of these approaches? Bankruptcy courts generally take the position that in reviewing reorganization and cramdown issues, it is important to balance the interest of the creditor in obtaining protection and compensation, while at the same time, setting an interest rate that is consistent with the fresh start offered by bankruptcy. There should be some consistency in approaches. Bankruptcy courts have the power to modify interest rates. There should be objective economic analysis applied, that weighs the risks of default with the fresh-start objective of bankruptcy.

Starting with the national prime rate of interest makes good sense. The “prime” rate (in the view of the Till case, cited above) is the “national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” Till, 124 S. Ct. at 1960. “A bankruptcy court is then required to adjust the prime rate to account for the greater nonpayment risk that bankrupt debtors typically pose.” Id.

But how should this “risk adjustment” be determined? There are several factors that need to be weighed. The interest rate should be high enough to allow the creditor some relief, but not so high as to torpedo the plan. As discussed in Till, the following factors are normally relevant:

  • Circumstances of the estate. This term is rather vague, but presumably means any factor or issue that will impact on the debtor’s ability to perform on the loan, or otherwise increase risk.
  • Nature of the security. This means specific things directly related to the security. Value, depreciation characteristics, and the debtor’s use of the collateral are some of these things.
  • Duration of the plan. Inflation and expected market volatility are typically factors here.
  • Feasibility of the plan. This would be the projected likelihood of success, that is, the debtor’s ability to perform the terms of the plan.

Regardless of the methods used, the setting of a cramdown interest rate is important in both Chapter 13 and Chapter 11 cases. In Chapter 13 cases, the issue may not come up with as much frequency as in Chapter 11 cases.

This is because many jurisdictions already have procedures whereby “trustee’s discount rates” of interest may be used. However, even model Chapter 13 plan formats allow debtors to set their own rates. Chapter 11 cases typically allow more creativity (or freedom) in crafting interest rates that can assist in the success of a Chapter 11 plan.

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

Damages For Violations Of The Automatic Stay In Bankruptcy Cases

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The bankruptcy automatic stay is one of the most fundamental protections provided to a debtor in a bankruptcy case. It is not, then, surprising that bankruptcy courts take a very dim view of creditors who ignore the protections granted to a debtor after the filing of a case. The bankruptcy code permits a debtor to recover damages for violations of the automatic stay; those provisions are contained in 11 U.S.C. §105(a) and 11 U.S.C. §362(k).

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

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

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

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

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

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

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

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

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

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

Buying And Selling Assets In A Chapter 11 Bankruptcy

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Chapter 11 cases are filed for many reasons.  One reason is a for an individual or business reorganization.  Another possible reason is for a business liquidation.  Why would a Chapter 11 case be used for a liquidation, when Chapter 7 already is available for that purpose?  The reasons are many.  In most situations, more value will be gained when the business is “wound down” by the owner gradually over time, rather than sold at “firesale” prices by a Chapter 7 trustee.

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