Category: Bankruptcy

Creditor Issues in Memphis Bankruptcy of Rusty Hyneman Sound Like Law School Exam

Law school exams are a strange creature. Generally, they present a crazy set of facts with a dozen twists and turns, all of which raise different legal issues. The student’s goal is to spot and discuss those issues.

I thought I was reading a law school exam question when I read this Commercial Appeal article about the Bankruptcy filing by Memphis developer Rusty Hyneman.

Hyneman is real estate developer, who has fallen on hard times, and his creditors are aggressively coming after him. Last week, one bank showed up with the sheriff to seize all personal possessions.

But, Hyneman was ready: he had documents showing that he didn’t own any of the stuff in his 12,000 square foot house free and clear. He had pledged it as security to another creditor…his dad.

Now, the banks are in issue spotting mode. They are alleging that the lien granted to the elder Hyneman is a fraudulent conveyance. They are attacking the priority of the father’s lien. They are attacking Hyneman’s proposed sale of his assets to repay his dad. Finally, they are arguing that the proposed purchaser of the assets is a sham entity.

Man-o-man, that’s four legal issues right there, and you can bet there will be a few more.

The best part about the story? The Judge handling this case is Judge Paulette Delk, my former Article 9 professor in law school. This Hyneman case will be a breeze for her, since she’s dealt with law school exams questions with more issues raised than this.

Speaking at Landlord-Tenant Law Seminar on April 28, 2011

On April 28, 2011, I’ll be speaking at the 8th Annual Landlord-Tenant Law-With a View from the Bench on Litigation Seminar in Nashville, presented by Sterling Education Services.

I’ll be teaching the afternoon session, on topics covering Collections, Enforcement of Judgment, Dealing with Tenant Bankruptcy, and Legal Ethics in Landlord-Tenant law.

Here’s the full agenda. This seminar gets lawyers continuing legal education credits, but it’s also designed for rental agents, landlords, and other non-lawyers who want to learn the legal process.

Sommet Group LLC Proof of Claim Deadline Set for May 18, 2011

When I write about creditors in bankruptcy, one of the mantras I repeat over and over again is:  don’t forget to file your Proof of Claim.

In many instances, the only way a creditor gets a distribution of money recovered by the Trustee is if the creditor has filed a claim. In fact, as a creditor, you’re hoping that other creditors miss the bar date/deadline for filing claims, because, if they don’t file a claim, they don’t get any money. Which, in turn, means the creditors with filed claims get a tiny bit larger share of the money.

All that having been said, the Chapter 7 Trustee in the Sommet Group LLC Bankruptcy filed a Trustee’s Notice of Assets & Request for Notice to Creditors to File Claims. The deadline to file the Claims has been set for May 18, 2011.

The Trustee is chasing this company hard, but, even so, he’ll probably only collect a fraction of the monies owed to creditors. The only way to guarantee that you don’t receive any money is to forget to file a Claim.

Sabre Defence Industries LLC files Chapter 11 Bankruptcy in Tennessee

You never want to be a creditor of a company that “manufactures high-quality XR15 rifles in the US and Europe.” But, many creditors find themselves in that position, as Sabre Defence Industries LLC has filed for Chapter 11 Bankruptcy in the Middle District of Tennessee.

This filing follows a variety of recent articles about criminal charges against the principals of Sabre Defence.

This case was apparently timed to stay a sale of the Sabre Defence assets by a creditor, Cadence Bank, that had been scheduled for February 14, 2011. So far, however, the bankruptcy contains only a skeletal filing–the company has filed a Petition, but not the required Bankruptcy Schedules and Statements.

Creditors of Sabre Defence need to be on the look-out for the various filings that are sure to follow, as I predict this case will go through a number of twists and turns long before the Meeting of Creditors. I’d bet on a 11 USC 363 Sale of the assets.

I realize that I missed an opportunity to make a joke about the “bullets flying” or a “shoot out.”

Update: Here’s the Nashville Business Journal’s story.

New Teaching Engagement: Liens and Security Interests in Tennessee

On Thursday, February 24, 2011, I’m teaching a webinar for the Tennessee Attorneys Memo called Liens and Security Interests in Tennessee: Brush Up on the Basics.

The webinar will provide an overview of liens against real property, and it’s designed to cover the basics but also emphasize the legal issues that you really need to know.

And by “really need to know,” I’m talking about the types of liens that will get your debts paid–judgment liens, mechanic’s liens, security interests–and I’ll also cover a variety of bankruptcy issues that you can try to avoid.

TAM does a great job with these, and I encourage you to tune in and check it out.  Plus, they offer a money-back guarantee.  (How much pressure is that on me?)

Are Bankruptcy Courts Creating a Co-Debtor Stay in Chapter 11 Reorganization Cases?

When collecting against an entity that files a Chapter 11 bankruptcy, I usually file an immediate suit against any guarantors of the debt. In Chapter 11, there is no statutory “co-debtor” stay, so there’s nothing stopping me from applying pressure to the other liable parties, who are usually the principals/owners of the company. The goal is not only to collect the debt from those parties, but also pressure the bankrupt entity to improve my client’s payment position.

Steve Jakubowski of the Bankruptcy Litigation Blog tweeted a recent decision that may scale back a creditor’s use of this tactic.

In the opinion, the debtors filed an adversary proceeding seeking an injunction of a collection action against guarantors, arguing that the collection action would adversely impact the ability of the debtor to reorganize.

The Bankruptcy Court agreed, finding that it had jurisdiction over the matter involving non-debtor entities under 11 U.S.C. 1334(b), since the action was “related to” to the underlying Bankruptcy. The Court found that the guarantors were “vital to the success of the reorganization process and that that the [collection action] would place a significant burden on Guarantors to the extent that [they] would not be able to adequately assist in the reorganization process.” Ultimately, the Court found that the guarantors were so critical to the reorganization process that the collection action against them would significantly impair the bankruptcy process and, thus, using 11 U.S.C. 105(a), the Court was willing to issue the injunction.

The Bankruptcy Court made clear that special factual circumstances existed, such as the guarantors’ past involvement and commitment to remain involved. Further, the Court noted that the guaranty liability isn’t extinguished and is, instead, only stayed during the pendency of the bankruptcy.

But, even with those safe-guards, it’s easy to imagine that this decision–if adopted by other courts–could create a common law co-debtor stay in Chapter 11s. Here’s a link to the full opinion:

Harris N.A. v. Gander Partners, LLC, No. 10-C-5495, 2011 WL 249484 (N.D. Ill. Jan. 26, 2011)

Sometimes the Postman Brings Bad News: The Notice of Chapter 7 Bankruptcy Case

If you’re doing your job as a creditor, some of your defendants will file bankruptcy.  More than likely, the way you’ll find out is when the Clerk mails you a “Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines.”

This is the first mailing in a bankruptcy case, and a copy goes to all of the creditors and parties listed in the debtor’s bankruptcy Schedules.

In addition to putting the creditor on notice of the filing (and the imposition of the automatic stay), this Notice contains important information about the case, including:

  • What chapter the debtor filed (i.e. Chapter 7)
  • The name and address of the debtor’s attorney and the Trustee
  • The bankruptcy case number
  • The address of the Bankruptcy Court Clerk (and where/how to file pleadings)
  • The date, time, and location of the Meeting of Creditors
  • Deadlines to file Proofs of Claim (if any)
  • Deadlines to object to discharge or dischargeability of your debt

All of this information is relevant as you decide what your next step is. Over the next few weeks, I’ll revisit the various events and deadlines mentioned in the Notice in more detail.

For now, I’ll point to the bottom of the Notice, where there’s a line that shows how optimistic the bankruptcy system is about the recovery of assets:

“Please Do Not File A Proof of Claim Unless You Receive a Notice To Do So”

You see, you have to file a Claim in order to share in the distribution of the money that the Trustee recovers. So, basically, that’s the Clerk’s way of nicely saying, “Don’t Hold Your Breath.”

A Trustee’s Powers in Bankruptcy: How the Trustee can Make Money for Creditors

Everybody is asking about the efforts of Irving Picard–the Trustee in the Madoff Bankruptcy–to recover the money lost by investors. His stated goal has been to recover all of the lost investments. The question is: How? (Or, Really?)

The goal of every bankruptcy trustee is to find money or assets to sell. In most cases (probably 98% of them), there are no assets (the people are broke and they owe money against all of their property).  Of other 2%, the assets recovered fall into three categories:

  • Actual, real assets:  The debtor has money, cars, property, or anything else of value that is lien-free, meaning they own it out-right, not subject to any creditor’s claim.  This is rare; most debtors stay out of bankruptcy in order to keep their assets away from a trustee.
  • Assets resulting from avoided liens:  Upon the filing of a bankruptcy, the trustee is granted an interest in the debtor’s property, called the “hypothetical judgment lien.” If any creditor’s lien on property is defective, the trustee can attack and eliminate that lien, thus creating a “lien-free” asset. Note to Secured Creditors: This is the most common way trustees find assets. 
  • Bankruptcy Lawsuits:  This includes lawsuits to recover preferential transfers, fraudulent conveyances, and various other post-petition actions. These types of actions aren’t rare, but they generally occur in the larger bankruptcy cases.

These are the most common weapons in a trustee’s arsenal. The Madoff Trustee is claiming that the alleged Ponzi scheme constitutes fraudulent transfers to the paid investors.  If he can recover all or most of the lost investments, he will have earned his money on this one.

Car Lenders Should be Weary of Pre-Bankruptcy Purchases

Bankrate poses an interesting reader question: Should I buy a car before filing Bankruptcy? Bankrate’s response is measured, and it focuses on ability to pay for the car, balanced with the assumption that the debtor will get better loan terms pre-Bankruptcy than after.

This is pretty common, whether it be borrowers strategically buying with their pre-Bankruptcy credit score or non-strategically buying a car without regard to their finances. Cars, being fairly important to get to work and around town, then become an issue in the bankruptcy case, as the debtor can’t simply surrender it to the creditor.

The changes to the Bankruptcy Code in 2005 recognized this issue and included protections for car lenders. In 11 U.S.C. Sec. 1325(a), Chapter 13 debtors must repay the full debt associated with any vehicle purchased within 910 days of the bankruptcy filing. (In regular terms, that’s about two and a half years.)

So, maybe there’s some benefit to buying a car right before a bankruptcy, but creditors have enhanced rights for those last minute purchases.

Plus, there’s an argument that incurring substantial credit before filing bankruptcy is deceptive  ( i.e. where someone buys a $30,000 car, while also planning a bankruptcy filing), and such transactions could be fraudulent and excepted from discharge. Not to mention, if the filing follows the purchase too closely, the Bankruptcy Trustee may be able to void the transaction and sell the car.

Long story short, you probably shouldn’t buy a car before filing for bankruptcy.

Co-Borrower Beware: Bankruptcy Provides Only Limited Protection to Co-Signers

Have you ever been asked by a relative to co-sign on a debt in order to help them get the car or apartment they want? Well, you’ve probably put a big target on your back, says the Bankruptcy Law Network.

In most cases, if the borrower files Bankruptcy, sooner or later, the creditor is going to take collection action against the co-signer. The reason is simple: the borrower needed your good credit to get the loan in the first place, so, obviously, the lender is going to look to you if the deal goes bad.

As the article above notes, a bankruptcy filing by the borrower only provides limited protection, if any at all.

The moral of the story? Don’t co-sign on debt, unless you’re willing to pay it all back in the end.