International Insolvency: Chapter 15 Cross-Border Bankruptcy Cases

Corporate Bankruptcy Firm In Kansas And Missouri

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

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

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

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

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

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

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

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

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

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

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

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

“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

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

buying

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

Bankruptcy trustees and courts permit debtors to make charitable and religious contributions.  Reasonableness is the operative guideline, as it is in much else in the bankruptcy world.  Historically, courts in the United States have been very deferential towards issues implicating religious or cultural freedom.  Even if tithes or charitable contributions are permitted, what is the limit?  Is there a bright line rule?  Or will the court evaluate such gifts on a case by case basis?

And if tithes are so allowed, will that prevent a debtor from claiming the “undue burden” standard in the context of a student loan dischargeability action?  One recent case from the Northern District of Iowa illustrated the interplay between contributions to religious organizations and the possible dischargeability of student loan debt.  The case in question was In Re Lovell (N.D. Iowa, 2012).

In Lovell, the debtor disclosed that she contributed about 11% of her gross income as tithes to a religious organization.  She filed an adversary proceeding seeking the discharge of her student loan debt, arguing (in accordance with 8th Circuit standards) that repayment of the student loan would impose and “undue burden” on her living standards.

She wished to continue her practice of charitable giving, and still discharge her student loans at the same time.  She was employed and was making an income that placed her solidly in the middle class.

The bankruptcy court first held that contributing 11% of one’s income in tithes was not per se unreasonable.  Rather, the better approach would be for an in-depth inquiry into be undertaken to determine whether the expenditure was reasonable, based on a consideration of all the attendant circumstances.

The 8th Circuit’s view of the “undue burden” standard for student loan dischargeability essentially focuses on all the facts and circumstances that a debtor is facing:  current monthly income and expenses are probed into in detail, to determine exactly what the debtor’s prospects might be for paying the loan back.  See, e.g., Walker v. Allie Mae Servicing Corp., 650 F.3d 1227 (8th Cir. 2011).

Of particular interest to the court was the fact that the debtor was still in the early stages of her career.  This being the case, there was a substantial likelihood that her earning power would increase as the years went by.  In addition, she stated that giving to her church was an important part of her religious beliefs.

Interestingly, the court found that whether tithing was “compulsory” was not a determinative factor in weighing the reasonableness of the expense.  This “hands off” approach is in keeping with the long tradition of deference that courts have shown in matters involving religious faith.  Bankruptcy courts in both Kansas and Missouri have both been very generous in their allowances for charitable contributions.  Debtors are often relieved to find out just how much leeway and freedom they are given in this regard.

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

In fact, a survey of the relevant case law shows that most courts have been tolerant of religious contributions that approach 15% of a debtor’s annual income.  Contributions of up to 15% have generally been held to be not presumptively unreasonable, although some creditors in student loan discharge cases have tried to argue that such a contribution would indicate a lack of “undue burden.”

In sum, the Lovell court made the point that no “bright line” rules can be set out for religious contributions.  Like everything else, charitable donations must be viewed in conjunction with everything else that is going on in a debtor’s financial life.  Tithing alone, absent other circumstances, will not disqualify a debtor from satisfying the “undue burden” standard.

Read More:  Student Loans In Bankruptcy In Kansas And Missouri

Buying And Selling Bankruptcy Proofs Of Claim: Understanding The Risks

Attorneys who deal with Chapter 13 and Chapter 11 cases will often see, in the claims registers listing the filed proofs of claim, corporate entities that have “bought up” proofs of claim from smaller creditors.  There are many companies, businesses, distressed debt investors, and hedge funds that specialize in purchasing bankruptcy debt.  There are also situations where larger creditors in Chapter 11 cases will make offers to buy the claims of smaller creditors, in an attempt to control the voting and direction of the Chapter 11 case.  Small creditors in bankruptcy cases may find themselves in confusion about what to do if they are contacted by a large organization asking to buy their claim.

What issues should be considered?  What are the advantages and disadvantages of selling a proof of claim?

Claims buyers can scrutinize bankruptcy court records and comb cases to see if it makes economic sense for them to purchase claims.  Claims buyers will prefer to purchase claims that are listed as “undisputed” rather than “contingent” or “disputed”, since undisputed debts are less likely to subject to litigation in a bankruptcy case.  They are seen as less of a risk.

Claims buyers will frequently sent out documents called “claim assignment agreements” or “confirmation” documents.  These documents should be reviewed carefully with an attorney with bankruptcy experience, before the claim is sold.  Things are not often what they appear.  Claims buyers have as their goal the maximization of their profit with a minimization of their risk.  With this in mind, let us examine the pros and cons of selling a bankruptcy proof of claim.

Pros

One of the most attractive reasons for selling a claim is the prospect of cash now, rather than the uncertainty of knowing when (if ever) the creditor will recover any funds in the bankruptcy estate.  Cash now has a real attraction to many small creditors who may not want to participate in the bankruptcy process.  Small creditors are enticed with the prospect of immediate liquidity, rather than dealing with the possibility of drawn-out legal proceedings.  Selling a claim now carries with it the perception of cutting one’s losses and eliminating future risk.  This “immediacy” value is the primary attraction of selling a claim.

Cons

But this immediate liquidity can be deceptive.  For one thing, it is important to remember that claims buys always want to buy at a steep discount.  It is a numbers game to them, and they buy claims in volume.  The amount you may be offered for your claim will be a fraction of what it may be worth.  Bankruptcy cases can be unpredictable.  Many cases that initially appear to offer nothing to unsecured creditors can generate significant funds down the road.  You never know when assets can and will be recovered.  To sell your claim too early can be a mistake.

  • Claims buyers often put crafty language into their “claim assignment agreements” that shift their risks back on to you, the seller.  Some of these provisions are buried in the fine print of the agreements.  Sometimes, language will be inserted that give the buyer the option of dumping the claim back on you (the seller) if an objection is filed to the proof of claim, even if the objection is later defeated.  Basically, the claims buyer can often use the fact of a claim challenge (by a bankruptcy debtor) to get its money back from a claims seller.  Objections to claims, preference actions, and other things that create work for a claims buyer can be used as a way of bailing out of their agreement with a claims seller.  Remember, the claims buyer is interested in making money with as little effort as possible.  Their goal is not to litigate claims in bankruptcy court.  Faced with a challenge, they will move on.
  • Another tactic used by claims buyers is to insert language in their agreements to require you (the seller) to defend the claim against possible objections at your own expense, and to pay the claims buyer back for any portion of the claim that might be disallowed.  The bottom line is this:  even after selling your claim, there is a possibility that you could incur costs in a bankruptcy case.
  • Your setoff rights may also be limited in a claim assignment agreement.  Some provisions of these agreements contain provisions limiting your rights to assert a setoff or recoupment against the bankruptcy debtor, or requiring you to pay back some (or all) of the purchase price if you do assert a setoff .
  • Unsecured creditors who may be serving on a creditors’ committee in a Chapter 11 case may have limitations on their rights to sell claims.  In some circumstances, there are confidentiality or other issues that will prevent such sales.  It is important to get legal advice in this type of situation.  Bankruptcy courts also sometimes restrict the rights of creditors from selling their claims.  Such rules are intended to prevent large institutional creditors from buying up claims and controlling the voting dynamics in Chapter 11 cases.  Another reason is to preserve the tax benefits of a debtor’s net operating losses (NOL), which can be lost if ownership of large amounts of claims changes.
  • When a claim is sold, a document called a “evidence of transfer of claim” is produced which is filed with the bankruptcy court.  As a safeguard against fraud, when such a document is filed, the seller is given an short opportunity to object to the transfer,  just in case the transfer was fraudulent.

Buying debt in bankruptcy cases, for large claims buyers, is all about making a profit.  Their goal will be to maximize their profit potential, while minimizing their risk.  Small creditors in bankruptcy cases should be aware of this.  The enticement of immediate money may be an illusion.  A small creditor who ignores the risks may find that he got more than he bargained for.  It is critical to consult with a bankruptcy attorney before selling your claim, so that you are aware of all the risks involved.

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