Can A California State Court Judgment or Arbitration Award Be Used In Bankruptcy Court?

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A sequence of events that takes place is a person lends money or credit is extended and then the borrower for whatever reason cannot continue to make payments and breaches the repayment agreement. The creditor then sues them in California Superior Court. There are numbers of ways to obtain a judgment, but a judgment is entered against the borrower in state court. Or an arbitration award is entered against the borrower. Can the judgment or arbitration award be used against the borrower if the borrower chooses to file for bankruptcy protection? Can the judgment be used to make the debt owed not discharged? This is an issue of issue preclusion. Can a judgment or arbitration award be entered against the borrower in Bankruptcy Court? Will the Bankruptcy Court require litigation of the same issue already decided by the judgment or arbitration award?

Like the answer to many legal questions bankruptcy attorneys must answer, the correct answer is it depends upon the judgment or language of the arbitration award. The Bankruptcy Appellate Panel for the Ninth Circuit recently discussed this issue in Richard Scott Urban vs. BCS West, LLC; BAP No. SC-13-1047. According to California state law California courts may apply issue preclusion only if certain requirements are met and if the application of issue preclusion furthers the public policies underlying the doctrine. The doctrine of issue preclusion is the theory that issues already decided in state court should or must be recognized by federal courts pursuant the Full Faith and Credit Clause of the United States Constitution. Under California law requires that (1) whether the issue sought to be precluded from relitigation is identical to that decided in the former proceeding; (2) whether the issue was actually litigated in the former proceeding; (3) whether the issue was necessarily decided in the former proceeding is final and on the merits; and (5) whether the party against whom preclusion is sought was the same as, or in privity with, that party to the state court proceeding. If these requirements are met California courts must further consider whether any overriding concerns about the fairness of the former proceeding are present or consistent with sound public policy.

Regarding an arbitrary award Federal Bankruptcy Courts can give California arbitration awards preclusive effect if the arbitration proceeding was held in an adjudicatory manner. Arbitration awards that have been confirmed by California courts have been given preclusive effect in Bankruptcy Court too. California judgments are more likely to be given preclusive effect given that they are more likely to satisfy the actually litigated factor listed above. Many arbitrations are not held in an adjudicatory manner.

One of the most important factors is the wording of the judgment or arbitration award and the facts that came to light in the California State Court matter. One of the main areas of Bankruptcy cases that California State Court judgment are used for issue preclusion purposes area in adversary proceedings to determine whether a debt or claim is discharged or if the debtor should receive a discharge of their debts at all. A bankruptcy attorney may not have been retained to represent the creditor or debtor in the California State Court litigation. The wording of the judgment or arbitration award will be extremely important for the Bankruptcy Court’s analysis if issue preclusion can be used. In Urban case the Bankruptcy Appellate Panel held that the arbitration award was ambiguous. In Federal Bankruptcy Court the question of whether all of the requirements for a debt to be deemed not discharged is an uphill battle and any ambiguity in the California State Court case will be decided in favor of the debtor or bankruptcy filer. What is proven in the California State Court will most likely not be exactly the same as a fraud charge, breach of fiduciary duty or willful or malicious injury. If you believe a person you are suing is going to file for bankruptcy protection in the future you must carefully craft your allegations and the wording of any judgment or arbitration award so that it can be used in bankruptcy court.

Bankruptcy Appeals – Yes, If You Do Not Agree With Bankruptcy Courts Order or Judgment You May Appeal to the Bankruptcy Appellate Panel

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Yes, if you do not agree with a bankruptcy court’s order or judgment you may appeal it. Bankruptcy appeals are the process of having a bankruptcy court’s order or judgment reviewed for error by the bankruptcy appellate panel or the district court for the district of the federal bankruptcy court your case is pending. Some district courts in the United States do not have appellate panels of sitting bankruptcy judges for the district to review appeals. If that is the case there is only the district court to appeal to. The decision to appeal should not be taken lightly given the time and expenses involved. Appealing an order or judgment to stop the order or judgment from becoming effective is risky business and arguably unethical for bankruptcy attorneys to be part of. If you believe an order or judgment was appealed to stop the order of judgment from becoming effective pending appeal you should hire a bankruptcy lawyer to file a motion for the order or judgment to become effective notwithstanding the appeal and seek sanctions.

Yes, if you do not agree with a bankruptcy court’s order or judgment you may appeal it.

Yes, if you do not agree with a bankruptcy court’s order or judgment you may appeal it.

To start the process you must file a notice of appeal with 14 days of lower bankruptcy court’s entry of the judgment or order. Please see Fed.R.Bankr.P 8002(a). See Key Bar Invs., Inc. v. Cahn (In re Cahn), 188 B.R. 627, 630 (9th Cir. BAP 1995) (citing Browder v. Dir., Dep’t of Corr. of Ill., 434 U.S. 257, 264 (1978) and Slimick v. Silva (In re Slimick), 928 F.2d 304, 306 (9th Cir.1990)). If the notice of appeal is not timely filed the appellate court has no jurisdiction to hear the appeal. See Preblich v. Battley, 181 F.3d 1048, 1056 (9th Cir. 1999).

The time to file a bankruptcy appeal can be extended by filing a motion with the court. The motion to extend the time must be filed before the time for filing a notice of appeal has expired. A motion to extend the time to file an appeal can also be filed within 21 days of the expiration of the 14 day period to file notice upon a showing of excusable neglect pursuant to Fed.R.Civ.P. 60. Be careful though. A party can seek to have the district court or bankruptcy appellate panel hold that the appeal was frivolous. Depending upon how frivolous just damages can be awarded and single or double costs against the party frivolously appealing.

Normally when an order or judgment is appealed a stay takes effect stopping the order or judgment from becoming effective until the district court or bankruptcy appellate panel rules. The bankruptcy judge can order the continuation of other proceedings while the appeal is pending. A motion for relief can be made also directly to the district court or bankruptcy appellate panel, but an explanation as to why relief was not sought and obtained from the bankruptcy court must be included. Likewise, if a judgment is appealed to the court of appeals from the district court or bankruptcy appellate panel the judgment is stayed pending the appeal to the court of appeals.

How Do I Get Rid of a Judgment or Judicial Lien From My House?

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When filing for bankruptcy you may avoid a judicial or judgment lien from your house pursuant to 11 U.S.C. §522(f) if the bankruptcy filers interest in that property would be exempt but for the existence of the judgment or judicial lien. A motion must be filed with the court and given that the lien can be avoided or removed without the consent of the lien holder notice of the motion to the lien holder is extremely important.

A recent Ninth Circuit Bankruptcy Appellate Panel case discusses the service requirements for a motion to avoid a lien. See Frates v. Wells Fargo Bank, N.A.; BAP No. NC-13-1366-JuKiD Before discuss this case further there are ways to get rid of the judgment lien from your house outside of filing for bankruptcy protection. You could satisfy the judgment entered against you. The amount you will have to pay will include prejudgment interest, post-judgment interest, costs of enforcement of the judgment and attorney fees and costs. You might be able to negotiate a settlement, make the payments and then the judicial lien holder should remove the lien. A lump sum cash payment today is better than years of payments and uncertainty of when the lien holder will ever see a penny to collect on the judgment.

When filing for bankruptcy you may avoid a judicial or judgment lien from your house.

When filing for bankruptcy you may avoid a judicial or judgment lien from your house.

Back to the Frates case. In this case the Frates’ filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. They had a judgment lien recorded against their house and sought to avoid the lien pursuant to Section 522(f) by filing the appropriate motion with the court. Wells Fargo was the lien holder and never responded to the motion. So the Frates’ bankruptcy attorney sought enter of the order by default on the motion to avoid. The Bankruptcy Court denied the entry of the order by default on procedural grounds: (1) the notice of the motion failed to identify the real property and (2) the notice, motion and accompanying pleadings were not served on counsel listed on the abstract of judgment as required under Cal. Code Civ. P. (CCP) § 684.010. The Frates’ bankruptcy attorneys moved for reconsideration which the court denied. This appeal was then filed.

Notice of this motion is the issue in this case. Rule 9014(a), in turn, provides that relief shall be requested by motion and “reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought.” The Bankruptcy Court for the Northern District of California has a scream or die notice process that may be used for certain motions pursuant to LBR 9014. Notice and opportunity for a hearing is served on the opposing party and then it is incumbent on the opposing party to file a timely opposition or request for hearing. If opposition or a request for hearing is not timely filed the party that filed the motion may request entry of the order by default. “The standard for what amounts to constitutionally adequate notice, however, is fairly low; it’s ‘notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objection.’” Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1202 (9th Cir. 2008) (citing Mullane, 339 U.S. at 314), aff’d, 559 U.S. 260 (2010).

Under these facts though Wells Fargo Bank, N.A. is an insured depository institution whereby service is governed by FRBP 7004(h). This rule provides service must be by certified mail addressed to an officer of the institution. In this case the debtors’ did serve Wells Fargo Bank, N.A. by certified mail and addressed the service to an officer of the institution. The other issue was whether California Civil Procedure Section 684.010 must be followed when serving a motion to avoid a lien. C.C.P. §684.010 governs judgment enforcement under California law and says notices and other papers are required to be served on the judgment creditor’s attorney of record rather than on the judgment creditor if the judgment creditor has an attorney of record. In Frates the 9th Circuit Bankruptcy Appellate Panel held that nowhere do the bankruptcy rules require compliance with C.C.P. §684.010 in lien avoidance actions and applying C.C.P. §684.010 creates confusion about where and when bankruptcy practitioners should follow state law even when they comply with applicable bankruptcy rules.

Bankruptcy Exemptions Are Very Powerful: See Supreme Court of the United States Decision in Law vs. Siegel, Chapter 7 Trustee

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Filing for bankruptcy protection is a way to obtain a fresh start. But what if after bankruptcy you are left penny less and barefoot. How can you start over at all? Exemptions protect some or all of your assets when filing for bankruptcy. Whether the exemptions protect all your stuff really depends upon what you have and how much it is worth. There are Federal Exemptions and each state can choose not to follow the Federal Exemptions and create their own. California Exemptions are pursuant to California Civil Procedure 703 and California Civil Procedure 704. In the Law case recently decided by the Supreme Court of the United States the Homestead Exemption pursuant to CCP §704.730(a)(1) is the focus of the case and the debtor’s conduct.

The bankruptcy filer, Stephen Law, filed for Chapter 7 bankruptcy in the Bankruptcy Court for the Central District of California. Alfred H. Siegel was appointed as the Chapter 7 bankruptcy trustee to administer the bankruptcy estate. Mr. Law and his bankruptcy lawyers properly listed his primary residence as an asset in Schedule “A” and that the primary residence had to mortgages or liens recorded against it as listed in Schedule “D”. Mr. Law valued the house at $363,348.00. Schedule D listed the first deed of trust of $147,156.52 and the second Lin deed of trust of $156,929.04. So the alleged secured debt recorded against Mr. Law’s house at the time of filing was $304,085.56. If the house is worth $363,348.00 then there is in theory $59,262.44 in equity Mr. Law can protect with the CCP 704 homestead exemption totaling $75,000. That is exactly what Mr. Law did. In his Schedule “C” Mr. Law applied the $75,000 exemption to the equity in his home and therefore there is allegedly no value to the bankruptcy estate for the benefit of creditors.

Bankruptcy Exemptions Are Very Powerful: See Supreme Court of the United States Decision in Law vs. Siegel, Chapter 7 Trustee

See Law vs. Siegel regarding how powerful bankruptcy exemptions are.

But wait a second. The Chapter 7 trustee, Alfred H. Siegel, for whatever reason believed the second deed of trust was a fraud. If that were true, the bankruptcy estate would be entitled to around $140,000 in equity in Mr. Law’s home after applying the homestead exemption. Turns out Mr. Siegel was right and to prove the second mortgage was a fraud in a lengthy legal battle. The bankruptcy court then surcharged Mr. Law’s $75,000 homestead exemption to pay for attorney’s fees and costs of the Chapter 7 trustee. This is where things went wrong according to the Supreme Court of the United States. SCOTUS held that surcharging an exemption to pay for administrative fees and costs is not allowed pursuant to the Bankruptcy Code. Even though Mr. Law committed fraud and it was proven at great expense, the Bankruptcy Court could not try and help remedy this wrong in this way. Bankruptcy exemptions are very powerful and once applied and not objected to in a timely manner prevent assets from being available to the Chapter 7 trustee and creditors for payment.

What could have happened is the Chapter 7 trustees’ bankruptcy attorney could have objected to Mr. Law’s use of the CCP 704 homestead exemption before the deadline passed. What the outcome of that fight would be is for further speculation. What we do know is that the bankruptcy court may have been able to penalize Mr. Law for his conduct within the grant of power the Bankruptcy Code provides. Bankruptcy exemptions are very powerful as provided in Supreme Court case Law. Vs. Siegel, Chapter 7 Trustee.

Detailed Look and Examination of Ex-NFL Football Player Jamal Lewis’ 2012 Bankruptcy Filing – Part III

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This is Part III in a series of blog articles analyzing and discussing the bankruptcy filing of former NFL player Jamal Lewis. Many celebrity bankruptcy cases are routine and not very interesting. Unfortunately for Jamal Lewis as bankruptcy cases go his is extremely interesting.

In Part II F.Xavier Baldera and Regions Bank asked the bankruptcy court for relief from stay to initiated the foreclosure sale of the 2007 Fountain Lightning 47’. The court of course granted their request since Mr. Lewis did not make payment to them to quite some time. But wait, there is far more to the F.Xavier Balderas and Regions Bank story. On July 6, 2012, prior to the case being converted to a case under Chapter 7, F.Xavier Balderas and Regions Bank filed a joint motion to extend the deadline to file a complaint to determine the dischargeability of the debt owed to them by Mr. Lewis. This means these creditors believe they have grounds to sue Mr. Lewis and obtain a judgment ruling that any debt owed to them should not be discharged in the bankruptcy case of Mr. Lewis. F.Xavier Baldera and Regions Bank want more time to gather evidence and determine if they should sue Mr. Lewis or not. This is basically as bad as it gets when filing for bankruptcy protection. It is one thing for a creditor to be given relief from the automatic stay. It is a whole other story when a creditor is trying to make a debt not ever go away. The whole point in filing for bankruptcy is to make debts go away forever. On July 6, 2012, the court granted their motion for more time. The deadline for F.Xavier Baldera and Regions Bank to file an adversary proceeding against Mr. Lewis was extended to September 14, 2012. There is more to come about F.Xavier Balderas’ and Regions Bank’s issues with Mr. Lewis. For now we need to discuss the other creditors and their interests in the bankruptcy estate of Mr. Lewis.

4. Navistar Financial Corporation

On July 6, 2012, Navistar Financial Corporation filed its motion to extend the deadline to file an adversary complaint pursuant to 11 U.S.C. §523 to object to the discharge of the debt owed to Navistar Financial Corporation. Navistar is an unsecured creditor in Mr. Lewis’ case listed in Schedule F as having a claim regarding possible personal guarantee on a business debt. No dollar amount is listed as owed. There is more to come regarding this creditor and whether or not they sue Mr. Lewis.

5. Hit-Em Hard Corporation

On July 11, 2012, Hit-Em Hard Corporation filed a stipulation for extension of the deadline to file an adversary complaint against Mr. Lewis pursuant to 11 U.S.C. §523 to object to the discharge of the debt owed to them. Hit-Em Hard Corporation is an unsecured creditor in Mr. Lewis’ case listed in Schedule F as having a claim regarding possible personal guarantee on a business debt. No dollar amount is listed as owed. There is more to come regarding this creditor and whether or not they sue Mr. Lewis.

6. Alpha Jordyn, LLC

On July 11, 2012, Alpha Jordyn, LLC, filed a stipulation for extension of the deadline to file an adversary complaint against Mr. Lewis pursuant to 11 U.S.C. §523 to object to the discharge of the debt owed to them. A stipulation is an agreement between two parties. Alpha Jordyn, LLC contacted Mr. Lewis’ bankruptcy lawyers and they agreed to an extension of the deadline. Alpha Jordyn, LLC, is also an unsecured creditor in Mr. Lewis’ case listed in Schedule F as having a claim regarding possible personal guarantee on a business debt. No dollar amount is listed as owed. There is more to come regarding this creditor and whether or not they sue Mr. Lewis.
So now F.Xavier Baldera and Regions Bank, Navistar Financial Corporation, Hit-Em Hard Corporation and Alpha Jordy, LLC, have until September 14, 2012, to sue Mr. Lewis and prove the debts owed to them should not be discharged in his bankruptcy case.

7. Transportation Alliance Bank

On August 8, 2012, John A. Thompson on behalf of Transportation Alliance Bank filed a motion for relief from stay. Transportation Alliance Bank is an industrial loan corporation with its principal place of business located in Utah. Transportation Alliance Bank alleges that Mr. Lewis owns a one-half undivided interest in real property located at Section 21, Township 12 – North, Range 21-West, Refugee Lands in Franklin County, Columbus, Ohio and more commonly known as Fort Rapids Water Park. Fort Rapids Water Park is an indoor waterpark with hotel accommodations and conference rooms. Transportation Alliance Bank alleges that Mr. Lewis took title to the property, as a joint tenant with a third party named Brownlee Reagan by warranty deed dated July 20, 2010. For some reason Mr. Lewis’ schedules of assets does not list Fort Rapids Water Park as an asset in Schedule A, but Schedule D does list Transportation Alliance Bank as having a second secured priority interest with the claim secured by Fort Rapids Indoor Waterpark Resort. Transportation Alliance Bank perfected its security interest by recording deed of trust against the waterpark on October 29, 2010. Keep in mind that Mr. Lewis filed for bankruptcy protection a mere 17 months later. The terms of the loan to Mr. Lewis by Transportation Alliance Bank were interest only payments to be made for 47 months with a balloon payment at the end of the 47 month term. As of April 10, 2012, Transportation Allican Ban is owed $2,338,803.58 by Mr. Lewis.

According to Transportation Alliance Bank Mr. Lewis only made the interest only payments until December 22, 2010, a couple months after receiving the loan. It also appears that on or around the same exact time Mr. Lewis was obtaining a loan from Transportation Alliance Bank he was also obtaining a loan for $5.1 million from Tennessee State Bank and using the same waterpark property as collateral to secure this loan too. It appears that the Tennessee State Bank won the race to record their security interest with assignment of rents before Transportation Alliance Bank recorded their deed of trust. Arguably then as, Mr. Lewis’ schedules of debts indicate, Transportation Alliance Bank has a second priority interest and Tennessee State Bank has the first position. In Transportation Alliance Bank’s motion for relief from stay they allege that the combined amount of the loans secured by the waterpark exceed the value of waterpark. They argue that Mr. Lewis is failing to adequately protect them due to Mr. Lewis no longer making interest only payments to them. In addition to receiving no payments, their loan being underwater or under secured, they argue the waterpark property is not necessary for Mr. Lewis to reorganize her debts in bankruptcy. When this motion for first filed Mr. Lewis was still in a Chapter 11 case. The case had not yet been converted to Chapter 7. While Transportation Alliance Bank’s motion was awaiting hearing Mr. Lewis converted his case to Chapter 7. Given the above facts Transportation Alliance Bank has grounds to obtain relief from the automatic stay and foreclosure on the waterpark pursuant to Ohio state law. There is more to come regarding Transportation Alliance Bank’s claim against Mr. Lewis totaling approximately $2.4 million.

To recap, this case started out as a Chapter 11 reorganization of debts case but was quickly converted to a case under Chapter 7. Mercedes Benz Financial Services USA, LLC agreed to allow Mr. Lewis to keep the 2010 Mercedes-Benz CL63 AMG with adequate protection payments from Mr. Lewis of $2,320.00 per month. Porsche Financial Services, Inc. asked permission from the court and received relief from the automatic stay to repossess the leased 2010 Porsche Panamera. F.Xavier Baldera and Regions Bank, Navistar Financial Corporation, Hit-Em Hard Corporation and Alpha Jordy, LLC, have until September 14, 2012, to sue Mr. Lewis and prove the debts owed to them should not be discharged in his bankruptcy case. Now Transportation Alliance Bank is asking the court for permission to foreclose on Mr. Lewis interest in a waterpark located in Ohio.

This concludes Part III. There are still six parties to discuss and find out what their interests are in Mr. Lewis’ bankruptcy case.

Detailed Look and Examination of Ex-NFL Football Player Jamal Lewis’ 2012 Bankruptcy Filing – Part II

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If you did not know, Mr. Lewis’ bankruptcy case is still an ongoing case. Part I goes through the first part of the bankruptcy case, describing the players and some procedure and addresses arguably why Mr. Lewis’ case was converted to a case under Chapter 7 so soon after originally filing a Chapter 11 reorganization case. Part II begins with describing the various interests of three lesser creditors and what they did to enforce their rights in Mr. Lewis’ bankruptcy case. Keep in mind that as soon as a person or company files for bankruptcy protection the order of relief becomes effective stopping any and all collection activity, lawsuits, wage garnishments, repossessions and foreclosures for example. This is the backbone of every bankruptcy case and the grant of power to the bankruptcy court and judge. The bankruptcy court is the single point of focus for relief if you are owed money or have a claim for money against the bankruptcy filer.

If the case is a reorganization case no more payments are made to vendors, mortgages or vehicle loans without court permission. It is assumed or most likely that secured creditor payments will be made in a plan of reorganization. Reorganizing or changing the payment terms of a mortgage or vehicle loan in Chapter 11 or Chapter 13 is the name of the game and why a person or company can still stay afloat. Bankruptcy is a way to force more favorable repayment terms on secured creditors and get rid of unsecured debts all at the same time.

High Creditor Involvement Means Nothing But Trouble For a Bankruptcy Filer

Mr. Lewis’ bankruptcy case has had quite a few creditors actively involved from the very beginning of the case. That means nothing but trouble for a debtor seeking to reorganize or discharge debts. There are over eleven creditors to be discussed. Here are the first three.

1. Mercedes Benz Financial Services USA, LLC

On May 1, 2012, Mercedes-Benz Financial Services USA, LLC filed a motion for adequate protection. At some point Mr. Lewis financed the purchase of a 2010 Mercedes-Benz CL63 AMG with a balance owed at the time the bankruptcy case was filed of $110,934.41. The monthly payment on the loan is $2,026.35. Mercedes-Benz filed this motion to make sure they get monthly payments from Mr. Lewis while the bankruptcy case progresses. All secured creditors are entitled to be adequately protected against the depreciation of their collateral. Vehicles decrease in value rapidly as time goes on and can be easily hid or moved to thwart repossession. At the time this motion was originally filed Mr. Lewis was still in a Chapter 11 reorganization case. It could have been months before Mercedes-Benz received payment through a confirmed/approved plan of reorganization if they just sat back and waited to see what happened. In the meantime the collateral securing their loan is decreasing in value. So Mercedes-Benz is enforcing its right to be adequately protected against depreciation of the 2010 CL63 AMG by receiving the monthly payment of $2,026.35 from Mr. Lewis. On June 12, 2012, a consent order was signed by the court. Mr. Lewis agreed to pay $2,320.00 to Mercedes-Benz each month. This means that Mr. Lewis intended to keep the 2010 Mercedes-Benz CL63 AMG.

The consent order comes with a catch though. If Mr. Lewis fails to make the adequate protection payment totaling $2,320.00 each month, then Mercedes-Benz is immediately granted the right to repossess the vehicle without further order of the court. A secured creditor cannot repossess its collateral without permission from the bankruptcy court. By filing the motion for adequate protection Mercedes-Benz has killed two birds with one stone. They obtained an order from the court for adequate protection payments and they obtained relief from the automatic stay to repossess the 2010 Mercedes-Benz if Mr. Lewis fails to make the post-petition adequate protection payment totaling $2,320 per month. Mercedes-Benz is set now. They can sit back and collect their money each month until the loan is paid off or repossess the 2010 Benz if Mr. Lewis misses a payment.

2. Porsche Financial Services, Inc.

Unlike Mercedes-Benz, Porsche Financial Services, Inc. finds itself in a different position. Mr. Lewis leased a 2010 Porsche Panamera. Mr. Lewis is not offering Porsche adequate protection payments and Mr. Lewis also has not made a payment on the lease since February 2012. The total owed is $88,788.58 at the time the bankruptcy case was filed. Given these circumstances Porsche filed a motion for relief from stay on May 3, 2012, requesting permission from the court to repossess the 2010 Porsche Panamera immediately. Why bother trying to get adequate protection if the lease is already past due and it appears Mr. Lewis has not intent of continuing to make any more payments. On July 17, 2012, the bankruptcy court entered the order granting Porsche Financial Services, Inc. relief from the automatic stay. They may now repossess the 2010 Porsche Panamera and sell the Porsche at auction to pay off the lease balance.

3. F. Xavier Balderas and Regions Bank

Now this is where it starts to get interesting. F.Xavier Balderas and Regions Bank filed a joint motion for relief from the automatic stay on June 27, 2012. Keep in mind again that Mr. Lewis’ case is still a Chapter 11 reorganization case at this time. Basically F.Xavier and Regions Bank are saying we do not care that you are seeking to reorganize your debts. We believe we have grounds to get the court to allow us to foreclosure or repossess our collateral and continue to go after you despite the fact that you filed for bankruptcy protection.
On or around June 20, 2007 Mr. Lewis obtained a loan totaling $416,000 at 7.15% interest from Am SouthBank, now named Regions Bank. The note was secured by a 2007 Fountain Lighting 47’ recreational boat. This is basically a cigarette racing boat. They have v-shaped hulls, are long and have multiple very powerful (700 HP) engines. Mr. Lewis borrowed additional unsecured sums of money from AmSouth Bank/Regions Bank and then stopped making payments. In 2011 Regions Bank filed a lawsuit against Mr. Lewis in the state of Tennessee to recover the amounts due pursuant to the various unpaid notes by Mr. Lewis. Eventually a judgment was entered against Mr. Lewis totaling $676,299.63. Of this amount about $420,820.00 is secured by the 2007 Fountain Lightning 47.’ Mr. Lewis, on May 17, 2012, testified at the 341 meeting of the creditors that the value of the 2007 Fountain Lighting 47’ was only about $300,000. So, Mr. Lewis is not making any adequate protection payments to Regions Bank (if fact it was so bad they sued him in state court), there is no equity in the boat (the amount owed is far more than the fair market value of the boat) and this is a recreational craft in the purest way and is in no way necessary for anyone to reorganize their debts in a Chapter 11 case. After the filing of Region’s original motion for relief from stay this case was converted to Chapter 7 and a Chapter 7 trustee was appointed to administer the assets of the Mr. Lewis’ bankruptcy estate on August 8, 2012. Under these circumstances the boat is of no value to the bankruptcy estate and creditors given the amount of debt is far more than the value of the boat.

What many people fail to understand or realize is that many people or companies that file for bankruptcy usually keep their cars, houses and even toys like a large recreation boat when seeking bankruptcy protection. If the asset is of no value to the estate (more is owed on the asset then the asset is worth) and the bankruptcy filer can afford to make the secured debt payment each month they usually can keep the asset and continue to make the loan payments. Secured debts get first priority in many ways. In a recent 9th Circuit Court of Appeals case, In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013, regarding secured debts in Chapter 13 reorganizations cases, the 9th Circuit held that Congress did not intend to limit the amount of secured debt a Chapter 13 bankruptcy filer has. So basically a single person can have two car payments, 2 ATV payments and a monthly plane loan payment with no money left over to pay unsecured credit cards and that is okay under the Bankruptcy Code and Section 707(b). Again, the system is geared for the benefit of secured creditors with collateral.

On September 17, 2012, the court signed the order granting Regions Bank full relief from the automatic stay and immediate permission to initiate the foreclosure sale of the 2007 Fountain Lightning 47’. This bank was fighting to be paid since 2011 by first initiating the state court lawsuit. They are owed more than $676,000 and will foreclose on collateral worth approximately $300,000. Regions Bank will be left with an unsecured claim of around $376,000 in Mr. Lewis’ bankruptcy case. What happens to their $676,000 general unsecured claim?

Please note that I have only discussed three creditors so far. Mercedes-Benz, Porsche and F.Xavier Regions Bank were fairly straight forward believe it or not. There are least ten creditors to discuss and things get worse, far worse.

Detailed Look and Examination of Ex-NFL Football Player Jamal Lewis’ 2012 Bankruptcy Filing – Part I

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On May 28, 2012, I first wrote an article about Jamal Lewis’ Chapter 11 bankruptcy filing in the Bankruptcy Court for the Northern District of Georgia, Bankruptcy Case Number 12-58938. Unfortunately since then Mr. Lewis’ case has taken a turn for the worse. Mr. Lewis filed the Chapter 11 reorganization case on April 3, 2012. On August 8, 2012, the case was unfortunately converted to Chapter 7, which means liquidation, not reorganization. In Chapter 11 reorganizations it is possible for a person or company with a fair amount of assets or income to reorganize their debts and come out in good shape and still be considered rich by a normal person’s standard. Chapter 7 means liquidation where only a limited amount of the bankruptcy filer’s assets can be protected and the rest are liquidated for the benefit of the people or companies that are owed money. I of course do not know every intimate detail, but it begs the question why did Jamal Lewis’ bankruptcy attorneys file a Chapter 11 reorganization case to begin with when the case was converted to Chapter 7 only four months after it was filed? It appears the reorganization never had a chance. The filing fee and process or reorganizing is extremely expensive in a Chapter 11 case. Especially a case like this one that has sharks circling it to shred it to pieces. As this article examines this case in detail you will discover how difficult it can be to seek a discharge of debts.

Various Parties And General Information About Filing A Bankruptcy Case

1. United States Trustees Office

First and foremost there is the United States Trustee’s Office or the UST, which is part of the Department of Justice. The UST is responsible for overseeing the administration of bankruptcy cases and the private trustees assigned to Chapter 7 and 13 cases pursuant to 11. U.S.C. §586. When a Chapter 11 reorganization case is filed it is assigned to an attorney within the UST’s office to oversee the reorganization. The UST does not take possession or have a right to possession of the assets of the bankruptcy estate though. This is a key difference regarding Chapter 9, 11 or 12 bankruptcy cases. The debtor, or bankruptcy filer, is a debtor-in-possession or DIP. This means the bankruptcy filer is in possession of the assets of the bankruptcy estate. The DIP must obtain court approval to spend assets of the bankruptcy estate to continue to operate a business or fund an individual’s ongoing living expenses. Some critics of this process ask why is the bankruptcy law allowing the assets of the bankruptcy estate to be left and continued to be managed by the entity or person who theoretically caused or contributed to the financial problems to begin with? Arguably the bankruptcy filer whether a person or a company is still has the most knowledge and in the best position to manage the day to day affairs and assets that are part of the bankruptcy estate. Also, the United States Trustee, Bankruptcy Court, Debtor’s attorney and creditors all monitor the use and preservation of property of the estate for the benefit of creditors. Creditors are much more likely to be active or participate in a Chapter 11 reorganization then a Chapter 13 reorganization.

2. Creditors

Creditors are defined by 11 U.S.C. §101(10) which provides that creditors means an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor; entity that has a claim against the estate of the kind specified in section 348(d), 502(f), 502(h) or 502(i) of this title; or entity that has a community claim. Any further explanation and digging into the Bankruptcy Code sections listed here is beyond the scope of this article. Basically creditors are those who are owed money or have a claim for money at the time the bankruptcy case is filed or when the case is converted to another chapter of the Bankruptcy Code. Creditors can attend the meeting of creditors and ask questions of the debtor, file objections to confirmation/approval of the plan of reorganization, seek relief from stay to protect their collateral or even file an adversary proceeding to object to the discharge of the debtor or the dischargeability of the debt or claim owed. Mr. Lewis’ bankruptcy case involves all of the above.

3. 11 U.S.C. §341 Meeting of Creditors and Equity Holder

This section of the bankruptcy code requires that a meeting be held that gives creditors an opportunity to ask questions about the income, expenses, assets and bankruptcy petition filed by the person or entity that filed for bankruptcy protection. Depending upon the circumstances no creditors may choose to attend. If so, then the trustee assigned to the case asks the debtor or responsible individual for a business, questions about the bankruptcy petition, their assets and income to verify information in the bankruptcy petition.

4. Filing a Proof of Claim

For a creditor to be paid money from the bankruptcy estate, if any, the creditor must file a proof of the amount they were owed by the debtor at the time the bankruptcy case was filed. A properly filed proof of claim will include documentation of why the creditor is entitled to be paid and how the amount of the claim was calculated. Federal Rule of Bankruptcy Procedure 3001 provides the required form and content of a valid claim. A proof of claim executed and filed in accordance with the rules shall constitute prima facie evidence of the validity and amount of the claim. If a debtor disagrees with how a claim is calculate an objection to the proof of claim can be filed. The amount of an allowed claim can mean the difference in a plan of reorganization being financially possible or not. Objecting to improperly or invalid proofs of claims filed is an important part of most reorganizations.

5. Unsecured Creditors Committee Counsel

If a Chapter 11 reorganization case is filed with hundreds of creditors there most likely will be the formation of a general unsecured creditors committee and an attorney appointed to represent all the interests of the unsecured creditors. The general unsecured creditors committee is usually comprised of the largest unsecured claim holders and the general unsecured creditors committee counsel is paid from property of the bankruptcy estate just like the attorney for the debtor. It is inefficient for each unsecured creditor to hire and pay individual attorneys to represent their interests. All general unsecured creditors share from the same pool of money, if any, so it is much more efficient to form a committee and pay one attorney to fight on their behalf.

6. Chapter 7 Trustee

When a Chapter 7 case is filed or converted to Chapter 7 from another chapter a Chapter 7 Trustee is assigned to administer the bankruptcy estate that is created. Chapter 7 trustees are independent contractors hired by the United States Trustee’s Office. Chapter 7 trustees are paid from the filing fee paid to file bankruptcy and a percentage of any assets paid out of the bankruptcy estate for the benefit of creditors. As of the writing of this article the percentages Chapter 7 trustees are paid when distributing assets to creditors are as follows: 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.

Why Was The Lewis Case Converted From Chapter 11 to Chapter 7?

There could be many reasons. According to the United States Trustee’s May 4, 2012, motion to dismiss, Mr. Lewis failed to file the mandatory documents pursuant to the United States Trustee’s Operating Guidelines and Reporting Requirements. Mr. Lewis and his bankruptcy lawyer also failed to appear for the Initial Debtor Interview. When filing a Chapter 11 reorganization case there are strict reporting guidelines regarding the monthly income and assets of the bankruptcy filer. The debtor is in possession and control of the assets of the bankruptcy estate, and therefore must provide records of what is taking place regarding the income and assets after the Chapter 11 reorganization case is filed.

After the 341 Hearing It Is Clear Why This Reorganization Case Was Converted To Chapter 7 So Quickly

The United States Trustee filed a supplemental motion to dismiss the case or convert the case to Chapter 7 on June 28, 2012, and the motion paints a much clearer picture as to why this case was converted to Chapter 7 liquidation so quickly. The motion provides excerpts from Mr. Lewis’ testimony at the meeting of the creditors. Mr. Lewis’ schedules listed $14,455,854 in assets with the majority of the value coming from JLew Financial, LLC ($6 million) and Grand Empire, LLC ($5 million). Mr. Lewis testified under penalty of perjury at the meeting of the creditors that the value of his interest in both of these limited liability companies was overstated in the schedules and the values are actually much less. Mr. Lewis’ Schedule D (Secured Debts) included claims exceeding $30 million and Schedule F (General Unsecured Claims) listed claims totaling $871,840.78. The UST believed the unsecured debts listed were much, much more. The Internal Revenue Service filed a claim listing unsecured priority debt owed to the IRS totaling $2,155,829.22 and a claim listing a general unsecured claim totaling $172,590.45. Mr. Lewis’ schedules listed the amount owed to Georgia Department of Revenue as $0.00, but the Georgia Department of Revenue filed a mostly priority tax debt claim totaling $1,619,742.41. So basically Mr. Lewis’ assets were actually far less than represented and his debts were far more than represented. To make matters worse Mr. Lewis testified that his income was far less than was his petition listed of $35,000 per month. The two most common ways to reorganize debts are either to make it happen through your income or sale of your assets. So that is that. No assets and no income with over $30 million in secured debt with collateral to be foreclosed on or repossessed and $3,775,571.60 in unsecured priority tax debt that is not dischargeable. The feasibility or possibility of a successful reorganization of Mr. Lewis’ debts is extremely low if not arguably impossible given these asset, income and debt figures. Therefore, after a mere four months after filing a Chapter 11 reorganization case Mr. Lewis’ consented to his case being converted to a Chapter 7 liquidation of this assets.

It is really difficult to speculate as to why Mr. Lewis filed a Chapter 11 case under his financial circumstances. The possibilities range anywhere from not wanting to believe he is going to basically lose it all by filing a Chapter 7 case to begin with, or misinformation about the process or the possible outcomes. From the outside looking in it is very easy to make assumptions and point fingers about what took place and why. The only real way to know the truth is if you were in the room when Mr. Lewis and his bankruptcy attorneys discussed his options, what to do about it and when. Part II of this article sheds light on Mr. Lewis’ case now that it is converted to a case under Chapter 7 of the Bankruptcy Code and the addition of the Chapter 7 trustee.

Celebrity and Current Free Agent Vince Young Filed For Chapter 11 Bankruptcy

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On January 17, 2014, ex-football play and celebrity Vince Young filed for bankruptcy protection under Chapter 11 of Title 11. Mr. Young filed in the Bankruptcy Court for the Southern District of California, Bankruptcy Case number 14-30400. Individuals with secured debts over $1,149,525.00 or unsecured debts exceeding $383,175.00 can reorganize their debts under Chapter 11 of the Bankruptcy Code. It is a much more expensive and complicated process then reorganizing debts under Chapter 13 of the Bankruptcy Code. The fact that Mr. Young filed for Chapter 11 is actually a very good sign regarding his financial situation. Time will tell if Mr. Young can confirm a plan of reorganization. Chapter 13 is reserved for individuals with debts of less than the debt limitations listed above. Chapter 13 is a much simpler, cheaper and streamlined process than reorganizing under Chapter 11.

As of right now Mr. Young’s bankruptcy lawyer has only filed the basic documents necessary to obtain an order for relief and begin the bankruptcy process. It is sometimes called a skeleton petition. There are no schedules of assets, income or expenses filed with the bankruptcy petition. The only indication of Mr. Young’s assets or debts are the boxes checked on the voluntary petition indication the number of creditors (1-49), amount of assets of Mr. Young ($500,001 – $1 million) and debts ($1,000,001 – $10 million. According to these ranges Mr. Young’s debts could far exceed his assets, but what we do not know from anything filed yet is Mr. Young’s income. For someone signed a contract for $58 million contract, with $26 million guaranteed, it is sad to see his asset range of only $500,001 to $1 million. It is early in the bankruptcy case and very little is known. The list of creditors sheds a little more light on the case though. The creditor list provides 20 creditors. A few of those owed money are America’s Servicing Company (mortgage), Applied Visuals, BMW Financial, Brian D. Jewab, David A. Chaumette, Exotic Diamonds, Jeff Heard, Major L. Adams II, Peoples Financial Services, Pro Player Funding LLC, Ronnie T. Peoples and Wells Fargo.

On the upside, there are many possible ways to successfully reorganize debts whether secured or unsecured. Hopefully Mr. Young has a decent income still and assets that will provide his bankruptcy attorney with options to help successfully reorganize Mr. Young’s debts.

One of the problems with reorganizing debts in a Chapter 11 case is the administrative expenses charged. This is includes the fees and costs for the bankruptcy filer’s attorney, the attorney for the unsecured creditors’ committee counsel (if any), accountants and other professionals that have a right to file fee applications for approval of their fees from the assets of the bankruptcy estate. Many creditors receive little to nothing after professionals incur high fees in administering the bankruptcy case. A bankruptcy estate of $2 million dollars can quickly become only $1.5 million or less after professional fees are approved and paid. That is a 25% decrease in assets available for the benefit of creditors. Please continue to check in on our Bay Area Bankruptcy Buzz blog for more information about Mr. Young’s bankruptcy case. We will be providing further information as the case unfolds.

Assets of the Bankruptcy Estate and Preservation or Use While the Case is Open

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When filing for bankruptcy protection all assets must be listed the bankruptcy petition schedules. This includes the amount of money the filer has in their bank accounts at the time the bankruptcy petition is filed. What if the bankruptcy filer wrote checks for their mortgage, car payment and cell phone before the bankruptcy petition was filed and the checks did not clear the bank account at the time the bankruptcy petition was filed? Does the amount listed in Schedule B for the balance of the bank accounts need to include the amount of the checks written but not cleared?

The answer is the amount listed in Schedule B should be the balance of the bank accounts at the time of filing. That is it. No deduction should be made for checks written but not cleared. In the Northern District of California many Chapter 7 trustees request bankruptcy attorneys provide their clients bank account statements that include the date the case was filed. The bankruptcy code does not specifically require this information be provided to the trustee, but there is a duty to cooperate with the trustee and they could easily obtain this information in a Fed. R. Bankr. P. 2004 examination. If the balance at the time of filing is significantly different in the bank account statement then what is listed in Schedule B you will have a problem. If there is no remaining exemption to protect the difference the trustee can request turnover of the unprotected funds.

What took place in a recently published 9th Circuit Court of Appeals case touches on this issue and whether a debtor must turnover property of the estate that is in their possession only at the time the motion for turnover is filed. Not what is originally listed in their bankruptcy schedules at the time the petition was filed. Please see, D.C. No. 2:10-cv-11726-ECR-GWF. In the Henson bankruptcy case, Ms. Henson had about $6,300 in her bank accounts at the time the case was filed with about $800 being protected by the applicable bankruptcy exemptions. So about $5,500 was not exempt and part of the bankruptcy estate for the benefit of creditors. Ms. Henson wrote a number of checks prior the petition being filed and transferred $3,239 to her bankruptcy lawyers account. Trustee Shapiro therefore filed a motion for Henson and her attorney to turnover the unexempt funds. At the time trustee Shapiro filed the motion for Henson to turnover the money she no longer had possessed it.

Assets of the Bankruptcy Estate and Preservation or Use While the Case is Open

Assets of the Bankruptcy Estate and Preservation or Use While the Case is Open

The Ninth Circuit Court of Appeals determined that a trustee’s turnover power pursuant to the plain language of Section 542(a) of the Bankruptcy Code is not restricted to property of the estate at the time the motion for turnover is filed. Section 542(a) provides that, “An entity . . . in possession, custody, or control, during the case, of property of the estate, or exempt property, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” During the case means the entire case and the statute states a trustee can seek turnover from a party that has or had possession of the asset. That is really pretty broad language. The 9th Circuit Court of Appeals continues by pointing out Section 542(a) also provides the trustee can request turnover of the value of such property. So the party that is being asked to turnover the property does not necessarily have to be in possession of the property any longer. The 8th Circuit does require that a party being requested to turnover property of the estate must have possession, custody, or control of the property at the time the motion for turnover is filed. This issue may go Supreme Court of the United States given this split in application of Section 542(a). For now, if a debtor is in possession of assets of the bankruptcy estate that are not exempt, then the debtor should probably take care to preserve those assets until the case is closed or the court enters an order compelling the trustee to abandon all assets of the bankruptcy estate.

Inside the Chapter 7 Bankruptcy Liquidation of Juno Baby, Inc.

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Back in January of 2013 I wrote an article about the unfortunate filing of Chapter 7 bankruptcy by Juno Baby, Inc. Juno Baby, Inc. filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on December 21, 2012, Bankr. Case No. 12-33574. So what is going to happen to Juno Baby, Inc. and its intellectual property?

On February 28, 2013, the Chapter 7 trustee assigned to liquidate the remaining assets of Juno Baby, Inv. Filed a motion pursuant to section 721 of the bankruptcy code to operate the business while it is liquidated. Section 721 provides that the court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate. No opposition to the trustee’s motion was filed. The Chapter 7 trustee requested approval to run Juno Baby, Inc. given that products of Juno Baby, Inc. were still being sold by Amazon.com. The proceeds from those sales are part of the bankruptcy estate and must be preserved for the benefit of creditors of Juno Baby, Inc.

On October 1, 2013, the Chapter 7 trustee filed a motion to sell the intellectual property of Juno Baby, Inc. According to the motion the intellectual property of Juno Baby, Inc. was sold to Super Pig Entertainment, LLC for a $22,500. The motion further provides that Super Pig Entertainment, LLC is a company owned by one of the former principles of Juno Baby, Inc., Belinda Takahashi. In 2009, Belinda and the other co-founder sold the business. On December 6, 2013, the Chapter 7 trustee filed an amended motion to sell the assets of Juno Baby, Inc. to clarify exactly what is being sold to Super Pig and what is not. The amended motion provides in part: “Pursuant to the Amended Sale Agreement, the Purchaser is purchasing all of the assets of the Debtor, including, without limitation, all copyrights, trademarks and other intellectual property, but not including all cash in the Debtor’s bank accounts, all proceeds of sales of the Debtor’s inventory deposited into the Debtor’s bank accounts on or before August 31, 2013, a State Board of Equalization refund in the amount of $13,926 received by the Trustee, and a potential Travelers Insurance Company refund scheduled by the Debtor in Schedule B in the Debtor’s bankruptcy case with an unknown valuation. The sale price for the assets is $22,500 which has been received by the Trustee.”

Juno Baby, Inc.’s bankruptcy schedules list $352,816 in assets and $6,913,903.00 in unsecured debts. Most of the assets are in the form of inventory totaling $331,806.00. So with the addition of the $22,500 in intellectual property funds received and the $13,926 for the BOE, the total available to creditors is approximately $368,232.00 (estimate only based upon court filings). Of course this is not counting the funds received from sales of product on Amazon.com, deducting the Chapter 7 trustee fee, attorney fees and accounting fees from the total. Juno Baby, Inc.’s creditors will be lucky if they receive a 5% distribution (5 cents for every dollar owed) from the bankruptcy estate of Juno Baby, Inc. That is also assuming that the inventory of $331,806.00 is even worth that.