Will an Adversary Proceeding Survive the Dismissal of the Bankruptcy Case? Maybe.

Eight years ago (8 years! You are reading a law blog that has lasted for 8 years!), I talked about the difference between a bankruptcy discharge and a dismissal.

The tl;dr version for creditors? Discharge is bad; dismissal is good.

But, what if you’re a creditor and the debtor has filed an adversary proceeding against you, but then the bankruptcy case is dismissed?

The tl;dr version? It depends.

Generally, the dismissal of the underlying bankruptcy case results in the dismissal of related adversary proceedings because federal jurisdiction is “premised upon the nexus between the underlying bankruptcy case and the related proceedings.” But, there are exceptions.

One such exception is for proceedings to enforce sanctions and contempt for violation of the automatic stay. A Bankruptcy Court will retain jurisdiction “for the purpose of vindicating the court’s own authority and to enforce its own orders.” See In re Bankston, 1:12-BK-14022-SDR, 2015 WL 6126440, at *2 (Bankr. E.D. Tenn. Oct. 15, 2015)

Basically, the reasoning goes, an action for contempt of court resulting from a party’s blatant disregard of the Bankruptcy Code and the authority of the Bankruptcy Court is something that the Bankruptcy Court takes very seriously and will enforce, independent of whether the underlying case still exists.

The reasoning is different for other types of proceedings that are dependent on the underlying case, like actions to recover avoidance preferences.

 

Beware of the 2018 Changes to the Bankruptcy Proof of Claim Bar Date

One of the biggest, most irreversible, mistakes a creditor lawyer can make is to miss the deadline for filing a Proof of Claim in Bankruptcy Court.

I’ve represented creditors who have done that, and I’ve researched excusable neglect, failure of notice, and every other legal theory out there, and, honestly, the creditor is toast.

So, my advice is: File your claims by the Claims Bar Date. Easy advice, right?

Well, a few days ago, I got a jolt of shock, remembering (the hard way) that they’ve changed the Bankruptcy rules related to filing of claims to shorten the deadline. I thought I had time, because the case was relatively new.

Effective December 1, 2017, in voluntary Chapter 7, 12 or 13 cases, pursuant to Federal Rule of Bankruptcy Procedure 3002(c), a proof of claim must be filed no later than 70 days after the bankruptcy filing date.

Under the prior version of Rule 3002(c), the creditor’s claim had to be filed no longer than 90 days after the first date set for the meeting of creditors. So, essentially, under the old law, you had about 130 days to file the Proof of Claim in bankruptcy cases.

In the past, my creditor and bank clients would receive a Notice of Bankruptcy Case Filing, process it internally, and then aim to refer the case to me in advance of the debtor’s Meeting of Creditors or, worst case, before the case was confirmed.

Now, I’m telling all my clients (and you, reader) file your claim or hire your attorney (me) as fast as possible.

 

Leases Can be Assigned in Bankruptcy Court, No Matter What the Lease Says

If you’re a smart commercial landlord (or you have smart drafting counsel), you’ll include a provision in your commercial lease agreement that prohibits transfers or assignments of the lease without the landlord’s consent.

The reasoning is obvious: Not all tenants are created equal, and it should be the landlord who gets to pick the tenants, not the tenants.

Despite an otherwise valid “anti-assignment” provision in a lease, a lease can be assigned by a bankruptcy debtor-in-possession or trustee under the Bankruptcy Code.

Specifically, 11 U.S.C. § 365(f) provides that:

(1) Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.

(2) The trustee may assign an executory contract or unexpired lease of the debtor only if–

(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and

(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

This will most likely come up in an Section 363 sale of the assets of the debtor, where a buyer gets the assets, along with certain court ordered benefits and protections (this subsection included).

No matter how well crafted certain documents are (whether it’s a note, deed of trust, or lease), there are certain situations in which a Bankruptcy Court will pre-empt state law. This is one of them.

 

Holding a Car Pursuant to a Mechanic’s Lien Doesn’t Violate the Automatic Stay

Generally, if you’re a creditor and you have possession of a bankrupt debtor’s possessions, you have to give it back when they file bankruptcy. But not always.

Today, I’m talking about mechanic’s liens.

As you’ll remember in Tennessee, Tenn. Code Ann. § 66-19-101 allows a mechanic to assert a lien for repairs performed on a vehicle, and, in order to preserve the super-priority perfection in the vehicle, the mechanic has to retain actual, physical possession of the car.

But, what about when the customer files bankruptcy, and the demand to turnover the vehicle comes from a Bankruptcy Attorney, alleging a violation of the automatic stay?

Bankruptcy Courts say that the mechanic can still hold on to the car.

Certain actions are excepted from the automatic stay, including “any act to perfect, or to maintain or continue the perfection of an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b)”  11 U.S.C.A. § 362(b)(3). Section 546(b) limits a trustee’s avoidance powers under 11 U.S.C.A. § 549 with respect to “the maintenance or continuation of perfection of an interest in property … [i]f a law … requires seizure of such property … to accomplish such perfection, or maintenance or continuation of perfection of an interest in property[.]” 11 U.S.C.A. § 546(b). Statutory liens such as mechanics liens fall within the scope of this exception.

That’s a lot of legal citations, so here’s the take away: if the repairman holds a statutory mechanics lien upon the vehicle for the repairs done, then the retention of the vehicle–even after the Bankruptcy Case is filed–does not violate the automatic stay.

In that case, the Debtor must either propose to pay the lien, fight it,  or give up the car. Good news for mechanics.

Auto Masters files Large Bankruptcy Case in Middle District

Bankruptcy filings are down in the Middle District of Tennessee Bankruptcy Courts. In the busy years, this district could expect anywhere from 13,000 to 15,000 cases to be filed annually under Chapter 7, 11, and 13. So far for 2017, only 7,000 cases have been filed. It’s a slow time for Bankruptcy, both because the economy in middle Tennessee continues to hum along strong–and because most people who were going to file Bankruptcy did over the last 4-5 years.

Our case filings got a big boost last night, as local car dealer and financier, Auto Masters, LLC,  filed for Chapter 11 Bankruptcy, along with 7 of their related entities.  This includes: Auto Masters of Franklin, LLC; Auto Masters of Clarksville, LLC; Auto Masters of Hermitage, LLC; Auto Masters of Madison, LLC; Auto Masters of Nashville, LLC; Auto Masters of Smyrna, LLC; and Auto Masters of West Nashville, LLC.

This is one of the largest debtor cases filed this year, and it’s no surprise to see the debtor is represented by Griffin Dunham, of Dunham Hildebrand, PLLC, one of Nashville’s more sophisticated (and litigious) debtor/creditor attorneys.

These filings closely follow the filing of a receivership lawsuit filed on Wednesday, October 11, 2017, by Capital One, NA, alleging default and requesting court review of Auto Masters’ business operations.

Expect a flurry of activity on these cases, since this case involves so many financial lenders, creditors, and impacted customers. This will be a big one.

 

 

Exceptions to the Automatic Stay Exist to Allow Enforcement of Some Materialmen’s Liens

When a borrower files bankruptcy, a good rule of thumb is that the automatic stay of 11 U.S.C. § 362 applies to stay any and all acts against the borrower or his property related to pre-petition causes of action and debts.

But, 11 U.S.C. § 362(b) provides some exceptions, include the exception found at § 362(b)(3), which provides that the automatic stay does not stay

…any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) of this title or to the extent that such act is accomplished within the period provided under section 547(e)(2)(A) of this title…
This section is most important to creditors who hold some lien interest in the debtor’s property, but the bankruptcy was filed during the time that the creditor was allowed to perfect them (or maintain them).
A Bankruptcy Court  in North Carolina recently issued an opinion that clearly shows how this exception should apply in Branch Banking & Trust Co. v. Construction Supervision Services, Inc. (In re Construction Supervision Services, Inc).
In that case, a subcontractor held valid but unperfected materialman’s lien rights on a property, which remained valid and enforceable, but for the bankruptcy filing. Because of the 362(b)(3) exception (i.e. the rights were valid and timely, except for the fact that a bankruptcy was filed), the contractor was able to assert those rights post-petition.
Again, the general rule is that a bankruptcy operates to stay all activity, but there are exceptions.

Multiple Bankruptcy Filings: Debtors are Ineligible for New Discharges for 8 Years Between Chapter 7 Bankruptcy Cases

How quickly can an individual who has received a Chapter 7 discharge obtain a new Chapter 7 discharge?

The answer is in 11 U.S.C.A. § 727(a)(8), which provides that the Bankruptcy Court shall grant a discharge, unless:

(8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;

So, the quick answer is that you count out 8 years from the date that the individual filed the first case in which he or she received a Discharge. Note: You don’t count the 8 years from the last discharge, but, instead, from the date that the earlier case was filed.

This is why you see what some people refer to as “Chapter 20” bankruptcy cases, in which a debtor receives a discharge in Chapter 7 and then immediately (or soon thereafter) files a subsequent Chapter 13 case. The debtor doesn’t get a discharge in the Chapter 13, but can get the other benefits of Chapter 13, like stretching out the amortization of a debt that was reaffirmed in Chapter 7 or obtaining a stay from collection on liens or reaffirmed debts.

This is a change from earlier law, which set the time period between discharges using a 6 year period.

 

Another side issue to consider: under 11 U.S.C.A. § 1328(f)(1), the debtor in a subsequent Chapter 13 will not receive a discharge in that Chapter 13 if he or she received a discharge under 7 or 11 in a case filed under 7 or 11 during the 4 year period preceding the Chapter 13 filing.