Under certain situations, a bankruptcy trustee may try to recover transfers made by a debtor to creditors before the filing of his case. These types of conveyances are termed “fraudulent conveyances.” But does an innocent transferee, who had no knowledge of a debtor’s coming bankruptcy, have any way to prevent a trustee from recovering this kind of a transfer? Under Section 548( c) of the Bankruptcy Code, a transferee can have an affirmative defense in such a situation.
Category Archives: Chapter 7 Bankruptcy in Kansas City
Is “Insolvency” Required Before Filing A Bankruptcy Petition?
Does a debtor have to be insolvent in order to file a Chapter 11 case? How is this word interpreted? These are the key questions that were addressed in the recent Ninth Circuit Court of Appeals case In Re Marshall III, 2013 WL 3242478 (9th Cir. June 28, 2013). The parties involved may be familiar to readers.
Texas millionaire J. Howard Marshall died, leaving almost all of his estate to his son Pierce. His wife Vicki (pop culture figure Anna Nicole Smith) and other son Howard were given nothing. Vicki and Howard contested the will in Texas probate court, and lost. In the probate proceedings, son Pierce won a significant judgment against brother Howard for fraud. Howard then filed for bankruptcy protection.
Pierce tried to contest brother Howard’s bankruptcy and plan. He moved to dismiss Howard’s case, arguing that debtor Howard was not “insolvent” under the “balance sheet” test. Looking at the debtor’s schedules and forms that were filed, Pierce noted that the debtor’s assets and income exceeded his liabilities. Under the Bankruptcy Clause of the Constitution, Pierce argued, a bankruptcy court could only deal with situations where a petitioner was insolvent. But what does the word actually mean?
The bankruptcy court first addressed the meaning of “insolvency.” Pierce believed that the court should apply the definition contained in section 101(32)(A) of the Bankruptcy Code. That section provides, in relevant part, that “insolvent means . . . with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at fair valuation.” Section 101(32)(A) basically uses the “balance sheet test” as the test for insolvency.
But this isn’t the end of the story. The word “insolvency” does not appear often in the Bankruptcy Code. One such instance is in Section 109(c)(3), which requires a municipality to be insolvent prior to filing for bankruptcy protection. But the meaning of “insolvency” in this section is governed by Section 101(32)(C) of the Bankruptcy Code, which uses a “cash flow test” for solvency.
The cash flow test is thus the only measuring stick that has some authority in the Code. And even there, it was only to describe a yard stick for a municipality. Should the same test be applied to persons or corporations? The bankruptcy court in the Marshall case rejected the “balance sheet test” as a proper guide for a debtor’s solvency.
The court noted that the Bankruptcy Code is designed to help people who have cash flow difficulties, even if they are “solvent” when looking at their balance sheet. Trying to apply a “balance sheet standard” would be unfair and inappropriate. The cash flow test (even assuming we should apply any test at all) would be the more appropriate test. There are sound reasons for this logic. The prospects of crafting an effective reorganization are better when a debtor is still solvent by any measure; erecting roadblocks and tests as barriers to filing a case would not be good policy.
A debtor should not have to wait until he is insolvent before filing a case. From studying other nations that had adopted such rules, the court found that substantial economic value was lost in applying those rules. In addition, a review of American and British common law demonstrated that “insolvency” was never a determinative factor in filing a petition until the 1978 adoption of the Bankruptcy Code.
Balance sheet insolvency is irrelevant even there; under Section 303(h)(1), an involuntary filing, for example, only requires a showing that the debtor is “not paying such debts as they become due.”
Thus, a debtor who is solvent (under any test) can file a voluntary Chapter 11 case and seek to have a plan of reorganization confirmed. A debtor is not required to wait until things are hopeless or nearly so.
This case highlights a principle that should be understood clearly: there is no reason for a debtor to wait until he becomes insolvent before filing a bankruptcy case. In almost all situations, his situation will be dramatically improved by getting a case filed as soon as cash flow problems begin. Waiting too long is neither required, nor advisable.
Read More: With Bankruptcy, School Cannot Deny Transcript
Arbitration, Mediation, And Bankruptcy: What Are The Limits?
Overland Park Business Bankruptcy Attorney
Judges in general are believers in mediation. It can be a highly effective way of identifying differences between litigants, crafting solutions to sticking points, and permitting litigants to vent their grievances. Bankruptcy judges can and do order mediation in situations where contested matters are in need of a push forward. But there are qualifications and limitations on arbitration, like anything else.
A recent Kansas bankruptcy case laid out some of these standards, and it is useful for us to discuss them. These issues were discussed in a memorandum opinion written by Judge Somers in the case of In Re Brooke in 2013. The opinion discusses who can compel arbitration, how a litigant can waive his ability to compel arbitration, and what things can be arbitrated in bankruptcy court.
With Bankruptcy Discharge, School Cannot Deny Transcript
Overland Park Bankruptcy Attorney
Can a school refuse to issue a transcript to a debtor who had wiped out his outstanding balance owed to the school in a bankruptcy case? No. A recent case demonstrates the power of the bankruptcy discharge in dealing with all types of collateral issues that might come about from the wiping out of debts in a case.
In In re Moore, 407 B.R. 855, 861 (Bankr. E.D. Va. 2009), the United States District Court for the Eastern District of Virginia found that Novus Law School violated a discharge injunction by refusing to issue a transcript or award a degree to Moore, a law student, until he paid his outstanding tuition balance, which had been discharged in Moore’s chapter 7 proceeding.
Defalcation In A Fiduciary Capacity: Bankruptcy Adversary Proceedings Under Sect. 523(a)(4)
Adversary proceedings contesting the dischargeability of debt in a bankruptcy case are rare, but they do happen. There are various types of nondischargeability actions that a bankruptcy debtor can face under 11 U.S.C. 523. One of these is an adversary proceeding under Sect. 523(a)(4) for “fraud” or “defalcation” while “acting in a fiduciary capacity.” This type of action is often brought as an additional count in an adversary petition along with other Section 523 claims, such as claims under 523(a)(2). They seem to be appearing more often than in the past, as creditors increasingly seek to have commercial debts classfied as “trusts” or “trust fund proceeds.”
Domestic Support And Child Support Obligations In Bankruptcy: Where Divorce Decrees And Bankruptcy Intersect
The advent of the BAPCPA (Bankruptcy Abuse and Consumer Protectioni Act) of 2005 brought some changes to the treatment of domestic obligations within the context of a bankruptcy case. Changes were also made to the operation of the automatic stay within the context of divorce proceedings, property divisions, and the modification of child support orders.
Involuntary Bankruptcy Cases In Kansas City
The vast majority of bankruptcy filings are “voluntary”, in the sense that the process is initiated by the debtor with the filing of a petition, accompanying schedules and forms, and if applicable, a Chapter 11, 12, or 13 plan or reorganization. There are, however, a small minority of “involuntary” bankruptcy filings, in which the process is initiated by a creditor or creditors of a debtor. The major requirements can be found in 11 U.S.C. Section 303, or Section 303 of the Bankruptcy Code. In an involuntary filing, a petition is filed in court, in which the court is basically asked if the individual or corporation can be put into bankruptcy.
First, there are some rules regarding the number of creditors. The Bankruptcy Code (Section 303) specifies the minimum number of creditors and amount of their claims. If a company has 12 or more creditors, an involuntary bankruptcy petition requires (a) three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition, and (b) those qualifying claims must total, in the aggregate, at least $10,000 if unsecured or $10,000 more than the value of any liens securing those claims if any are secured. If the company has fewer than 12 creditors, it only takes one qualifying creditor to file an involuntary petition.
Additional creditors can join the petition later, If only one creditor files and it turns out that the company has more than 12 creditors, the bankruptcy court will give other creditors an opportunity to join. If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company or person also must: (1) generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or (2) have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.
In the involuntary petition, the petitioning creditors must state on the petition which chapter (Chapter 7 or Chapter 11) they wish to force the person or company to into. These two chapters are the only ones available for involuntary cases. In other words, you can’t have an involuntary Chapter 13 or Chapter 12 case.
There are some big differences between involuntary and voluntary cases. In an involuntary case, the automatic stay does begin when the petition is filed, just as in a voluntary case. But there are some major differences between the two types of scenarios after that. In an involuntary case:
1. After an involuntary petition is filed (Chapter 7 or 11), a company can still continue to operate its business until the court has actually ruled that the company should be in bankruptcy. The petition is served together with a summons. The involuntary petition is more like a request to a court asking that the company or person be declared to be bankrupt. So, due process here is an issue.
2. In an involuntary case, a trustee is not automatically appointed. It can be sought by motion, but the court may not grant this request.
3. The debtor has the power to respond to the involuntary petition and propose counter-remedies. For example, in an involuntary Chapter 7 filing, the debtor could respond with its own Chapter 11 filing and resume control over the company or personal affairs as a debtor in possession.
4. A debtor has the power to contest an involuntary petition, usually by means of an answer or motion to dismiss (or both) and must do so within required time limits (21 days after service of the summons, under the Federal Rules of Bankruptcy Procedure).
5. In an involuntary case, there is normally a significant amount of litigation right in the beginning to determine whether the proper requirements of an involuntary case have been met. Companies and persons do not usually like to be “forced” into bankruptcy court by the filing of an involuntary petition. If the bankruptcy court finds in favor of the petitioning creditors, an order of relief is entered and the debtor is “placed” into bankruptcy. And at that point, the provisions of the Bankruptcy Code governing debtors and creditors will come into play.
Involuntary petitions are also rare because there can be unpleasant consequences to creditors who frivolously attempt to put an entity or person into bankruptcy case without a very good reason. A debtor who has been hit with an involuntary petition without good reason is not going to take kindly to this type of extreme collection activity. Consider the following:
1. An involuntary petition cannot be dismissed once filed without a notice and opportunity for hearing, even if all parties agree.
2. If an involuntary petition is dismissed, the creditors who brought the action can be liable for the debtor’s fees and costs.
3. If the bankruptcy court determines that the petition against the debtor was filed frivolously or in bad faith, the creditors who initiated the action can be liable for damages, and in some situations, even punitive damages.
It is clear from the foregoing that involuntary cases are very different from the standard bankruptcy process. The possibility that creditors can be found liable for damages and costs for vindictive filings means that few creditors are willing to take the plunge into this “nuclear option” in the debt collection world. In addition, it may be that the prospect of financial recovery for creditors is outweighed by the difficulties of litigation or the likelihood of finding assets. But involuntary cases do happen. Sometimes, an unusual circumstance or event can make it worthwhile for a creditor or creditors to go forward with it.
They seem to most often happen in situations where some sort of fraud, malfeasance, or significant hiding of assets may have taken place, or situations where some sort of Ponzi scheme has been discovered by creditors. We have also seen it in situations where large amounts of equity exist in commercial or residential real estate that cannot be tapped into by aggressive judgment creditors. In most situations, aggressive collection activity by creditors individually or in concert will be enough to force a debtor to simply file a case on his own. If you have questions with this area of the law, you need an experienced bankruptcy attorney.
Read More: Debts From Ponzi Schemes: Dischargeable In Bankruptcy?
Title Loans And Bankruptcy In Kansas City
Overland Park Bankruptcy Lawyer
There are situations where people will take out a short term loan against their car or some other vehicle. Typically, these loans have high rates of interest, and are marketed to people who are unable to secure credit in more traditional ways. Their treatment in bankruptcy can come as a great relief to debtors who find themselves paying and paying, yet never making any headway in paying off the loan.
Payday Loans And Bankruptcy In Kansas City
Overland Park Bankruptcy Attorney
Payday loans are extremely high-interest, short-term loans that are targeted to people who have an immediate need for a loan. Are these loans treated any differently in bankruptcy from other debts? Are the threats and harassment from these companies to be taken seriously? Persons filing bankruptcy with payday loan debt need to be aware of several issues when it comes to payday loans.
First, payday loan companies are creditors like any other,and their debts will be discharged like any other unsecured creditor or signature loan. However, there are some special nuances to these types of creditors that you should be aware of, so that you can better protect yourself.
Can Utility Service Be Disconnected In A Bankruptcy Case In Kansas City?
Overland Park Bankruptcy Lawyer
One of the issues that arises in a bankruptcy filing is whether a utility company (i.e., gas, water, light, etc.) can disconnect a debtor’s utility service after a bankruptcy case is filed. Under Section 366(a) of the Bankruptcy Code, a utility service is prohibited from “altering, refusing, or discontinuing service to, or discriminating against, a trustee or debtor solely on the grounds that the debtor has not paid its pre-petition debts when due.” Section 366(a) is a temporary prohibition, and it has qualifiers.
Kansas City Bankruptcy And Criminal Case Defense Information 
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