Monthly Archives: January 2013

Juno Baby, Inc. Unfortunately Filed For Chapter 7 Bankruptcy

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Every now and then while I wait for my client’s case to be called at a 341 meeting of a creditors an interesting business bankruptcy case is called first. Unfortunately today that case was for Juno Baby, Inc. Juno Baby, Inc.’s bankruptcy attorney filed their petiton for bankruptcy protection under Chapter 7 of the Bankruptcy Code on December 21, 2012, Bankr. Case No. 12-33574.

I remember when this Juno Baby first started appearing because my brother had just welcomed his first child into the world in 2008. They were researching all kinds of learning tools for their first child. They liked the concept of songs and music teaching their child. What a great idea. Juno Baby was one that came up. Also with the happenstance of life I had a client who owned stock in Juno Baby, Inc. as well.

According to testimony by a former Juno Baby, Inc. CEO at Juno Baby, Inc.’s 341 meeting of the creditors today, Juno Baby, Inc. unfortunately did not catch on like you would think. According the California Secretary of State Juno Baby, Inc. was incorporated on April 16, 2009. The original founders basically sold all of the intellectual property of Juno Baby, LLC to Juno Baby, Inc. There were approximately three rounds of funding to start Juno Baby, Inc. The total amount of investment capital raised was around $4.2 million. According to their former CEO, Juno Baby, Inc. has not operated since 2011. An interesting twist that came up was the timing of the launch of the business and the emerging use of smart phones and launch of the IPAD. Originally Juno Baby, Inc. was focused on producing content in the form of DVDs. The shift was on to other platforms and apps with the Apple Store.

The 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. What is clearly unknown in this case is: What is the value of the intellectual property such as the copyrighted content produced by Juno Baby, Inc.? Unfortunately for creditors there may not be any market out there to sell the intellectual property. There are number of creditors that are owed money such as Amazon.com. The single largest creditor is Peter Dal Pezzo for a loan totaling $6,681,742. Mr. Dal Pezzo’s claim represents 96.6% of the total claims against Juno Baby, Inc. If you are a bankruptcy lawyer representing a creditor it will be interesting whether the intellectual property created can be sold off to another company or individual for the benefit of creditors. Only time will tell. For now it marks the end for a once promising concept under the name Juno Baby. I do not think my brother ever ended up purchasing any of their products also. He probably owns some Baby Eistein stuff though.

Will I Get My Chapter 13 Plan Payments Back If My Case Is Dismissed Before Being Confirmed or Approved?

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There are many reasons why a Chapter 13 bankruptcy case would be dismissed. But what happens after the case is dismissed before the Chapter 13 plan is confirmed or approved? One of the most common questions is what happens to the Chapter 13 Plan payments I made to the Chapter 13 trustee’s office? What about my car payment or other people I owe money to after the case is dismissed?

Chapter 13 Trustee Payments

This is probably the most common question because everyone wants to get the money back they paid into the Chapter 13 plan when the case is dismissed. The money you get back depends upon how many months ago the case was filed and the language of the plan and what is going on in your case. If you have provided for pre-confirmation adequate protection payments to a creditor like a car loan company then those payments plus the Chapter 13 trustee percentage will be subtracted from the amount you get back. Some Chapter 13 plans include a provision that your bankruptcy lawyer will receive some of their attorney fees in the event the case is dismissed. So you may have to subtract all or a portion of your bankruptcy attorney fees from the amount you will get back. This same respect of course was not given to attorneys for debtors. In Chapter 13 cases, rarely at the fault of the attorney for the debtor, the Chapter 13 Plan is not confirmed and the case is dismissed.

Also, as of October 1, 2012, a Chapter 13 trustee is allowed to take a percentage of the Chapter 13 plan payments they return to you for their administrative costs. This is how the Chapter 13 trustee’s office gets paid. They get a percentage of the Chapter 13 plan payments they receive and then pay out to creditors (creditors have to file a valid claim pursuant to FRBP 3001). They used to only be allowed to take their percentage on pre-confirmation adequate protection payment and disbursements of funds after the chapter 13 plan was confirmed or approved. The United States Trustee, a part of the Department of Justice, in August 2012 decided it was okay for the trustee’s to also take their percentage from the amount refunded to people who file for bankruptcy in the event the case is dismissed.

What About The Attorney For The Debtor? How Do They Make Out Upon Pre-Confirmation Dismissal?

Does the attorney for the debtor get paid for all of their time upon dismissal of the Chapter 13 case pre-confirmation? Nope. The debtor’s attorney gets what they received as a retainer prior to the Chapter 13 case being filed. Then if you try and actually get paid for your time you run the risk of getting sued or a one-star review of Yelp for just seeking payment for the actual and necessary time and expenses expended for the benefit of the client.

How much is that? It depends. What happens though is the longer the Chapter 13 case is pending the more time and money the bankruptcy attorney has to expend to keep the case going and get the relief the client is seeking. This causes a horrible conflict of interest created by the compensation rules as they stand right now in the Northern District of California and other districts and Chapter 13 cases. Each and every client is indebted to me post-petition very quickly. Most of my time is front loaded and that is the correct way to properly represent debtors. If you do not go down every road to see if the bridge is out good luck after the case is filed figuring it out in a timely and efficient manner. Bankruptcy is an area of the law that you better have your ducks in a row before filing. So I will spend at least 2-3 hours before the petition is even started to be drafted to make sure we can be successful in reorganizing our client’s debts in Chapter 13. The meeting of the creditors comes around about 30 days after the petition for bankruptcy is filed. I now have around $200 – $300 in real paid expenses and anywhere from 10 – 15 hours into the case upon conclusion of the 341 meeting of creditors. At $350 an hour that is from $3,500 – $5,250 in attorneys fees and expenses expended for the benefit of the client. This is in a case that does not have any issues to address or argue about. If actually have to advocate on behalf of my client because a creditor or trustee’s office is not following the law or interpreting it differently look out. I am now into the case for anywhere from $5,250 to $15,000 [to get this money I have to file a application for approval of my fees and costs with a hearing; that is an additional $2,000 I have to spend just to get the time and expenses I have already spent approved] for fulfilling my obligation to my client regardless of the likelihood of being paid for my time. This is about as benign a way for me to describe these circumstances to you given I am in the boat. I also am poor so I have no real voice or choice in this. I think my largest problem with this I know that in the real world circumstances like this COULD never happen. On the street this COULD never happen. On street you instant personal liability for your choices. I am not condoning violence or vigilante justice. All I am saying is the world has a way of checking you in the natural course of things, some may call it “instant karma,” if you run afoul of another human being. But that is not how most things work today. The cannons or natural law that governed human interaction for thousands of years has been thrown out the window for a system that creates inequities between humans for financial gain. Corporations and a government that can do things and make decisions and have ABSOLUTELY no risk of going to jail for it or losing everything they have worked for their entire life. I put everything on the line each and every day I do business as an attorney. I am always personally responsible by operation of law. I live and work in the community I practice law in. Anyone can walk into my office and tell me what is up from down if they feel it is necessary. That is not how the government or corporations (directors and officers of corporation) have to face with their decisions. Hell, corporations just crunch the numbers and determine if dealing with the death and destruction they are going to cause makes more money than paying the insurance claim or setting up a fund to compensate the victims. Time and time again it seems the human cost can be dealt with and the corporation can still turn a profit so the stock market continues to go up and up. The government at this point is not much different in their decision making it seems. I digress . . . . . . .

At this point maybe the Chapter 13 Plan is confirmed and or possibly not. I can say the only reason our firm does not get a Chapter 13 Plan confirmed is because our client unfortunately cannot or chooses to not do what they are instructed to do to be successful in reorganizing their debts. It is never any fault or lack of effort on our part. We just left holding the bag time and time again. I give free consultations and lose anywhere from $5,000 – $30,000 every year over this issue. If that fair? At some point the powers at be decided the Chapter 13 Trustee’s office should not have to work for free if a case is dismissed pre-confirmation. Somehow that same respect is not given to bankruptcy attorneys. Instead the enforcement of the rules of bankruptcy attorney compensation create a conflict of interest with our clients almost instantly that no one seems to care to change. How sad. So I choose to work for free to uphold my obligation to my clients and the law as their bankruptcy attorney despite the issues discussed above.

Car Loan Payments

This issue was briefly mentioned above regarding pre-confirmation adequate protection payments. Some Chapter 13 trustees will require, or you might be able to cramdown (pay less than what you owe on the loan at the time your case is filed), that your car loan payments be paid inside the Chapter 13 plan. This means instead of making your car payment directly to the car loan company the payment will be made as part of the monthly chapter 13 plan payment to the trustee’s office. If the chapter 13 plan calls for paying pre-confirmation adequate protection payments then the car loan company will receive a car loan payment each month and there will not be a huge amount to catch up on once the case is dismissed. You will have to deduct the payments made to your car loan company if the case is dismissed. What if there are no pre-confirmation adequate protection payments being made? Under this circumstance your car loan company will not have received any payments on the car loan for however many months you were in the bankruptcy case and the chapter 13 plan was not confirmed or approved by the bankruptcy court. If you were in the case for 10 months before it was dismissed and the monthly car loan payment prior to filing bankruptcy was $250, then you will be behind $2,500 in car payments once the case is dismissed.

Can I Change or Modify My Chapter 13 Plan Once It Is Confirmed or Approved?

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Yes, you can change your chapter 13 plan once it is confirmed or approved by the Bankruptcy Court. The Ninth Circuit Bankruptcy Appellate Panel discussed this issue in Mattson v. Howe (In re Mattson), 468 B.R. 361 (9th Cir. BAP April, 2012). The BAP discussed whether the debtor must show a substantial unanticipated change in their circumstances to modify the approved or confirmed chapter 13 plan of reorganization.

Section 1329 of the Bankruptcy Code provides that at any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim . . . .

A number of circuits have adopted the “substantial and unanticipated change” test for whether a plan modification should be allowed or not. The Ninth Circuit has adopted no such test. The greatest hurtle a plan modification might face is a good faith test under Section 1325(a)(3) of the Bankruptcy Code. A modification of a confirmed plan must still be presented in good faith based upon the totality of the circumstances. In the Mattson case the Bankruptcy Appellate Panel provides that, “In the end, in evaluating plan modifications, it may make little practical difference whether the bankruptcy court applies the substantial and unanticipated change test as a threshold requirement or uses it as a discretionary tool.” Mattson v. Howe (In re Mattson), 468 B.R. 361, 369 (B.A.P. 9th Cir. 2012). “[T]he bankruptcy court believed that the good faith test lacked predictability and therefore added the requirements of the substantial and unanticipated change test and that the change in the plan correlate to the change in circumstances.” Mattson at 371 (discussing the standard used by the trial court). “We conclude that the bankruptcy court’s second requirement—that the proposed modification correlate to Debtors’ change in circumstances—necessarily implicates a good faith analysis.” Mattson at 371. “[W]e view the bankruptcy court’s correlation requirement as simply another factor that may be considered under the totality of circumstances approach to a good faith analysis in this Circuit. We emphasize, however, that no single factor is determinative of the lack of good faith.” Mattson at 371.

So what can bankruptcy attorneys take away from this case? Basically if you are going to request a modification of a confirmed plan make sure something bad has happened to your client that makes the change in the plan reasonable and in good faith based upon the totality of the circumstances. Do not have something good happen to your clients then try and change the plan that potentially harms the creditors in the case. In the Mattson case increasing the plan payment to $1,000 a month for 36 months rather than the $150 a month payment for 60 months would benefit creditors so . . . . I do not know what happened after the appeal, but I wonder if the Mattson’s bankruptcy lawyers got them stuck in a 60 month plan paying $1,000 a month?

What Relief Does The American Taxpayer Relief Act of 2012 Actually Provide Anyone?

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I always like to read what new laws are named and then read the law to find out what the law actually does and if the name is appropriate. The American Taxpayer Relief Act of 2012 or H.R. 8 raises taxes on anyone making over $400,000 and is single, and $450,000 if married. It also has a phase-out of tax deductions and credits for people whose incomes over $250,000 for individuals and $300,000 for couples. It also increases the amount estates totaling over $5,250,000 are taxed when someone dies from 35% to 40%. I have never been a fan of the death tax. The two-year old cut to payroll taxes was not extended. The payroll tax rate had been reduced from 6.2% to 4.2% for 2011 and 2012. That hurts all of us working stiffs out there each and every month. Take a look at your paycheck today. It is smaller than in 2012. So as a bankruptcy attorney I am asking where is the relief?

The Mortgage Debt Relief Act of 2007 was extended to January 1, 2014

At last there is bit of relief in this new law. Section 202: Extension of Exclusion From Gross Income of Discharge of Qualified Principal Residence Indebtedness. What does this mean? It means that if you house is foreclosed on in 2013 then the difference between what your home is worth and what you owe on the loan cannot be counted as taxable income just like in 2007 – 2012. When your home is foreclosed on or short-sold the bank that had the loan will issue a 1099-C or possibly a 1099-A for (C) cancellation of debt or (A) abandonment for the difference between the value of the house and what is owed on the loan. Of course most houses purchased recently are not worth what is owed on the loan. The cancellation of debt is not always taxable though. The cancellation of debt or difference is a taxable event unless it was (1) discharged in bankruptcy (2) you were insolvent at the time of the event (See IRS Form 982) OR (3) the house was your principal place of residence and the debt was incurred to buy, build or improve your principal residence or refinance that debt. See IRS Publication 4681.

So the extension to January 1, 2014, is definitely a positive and something that is unfortunately still necessary. The mortgage crisis is still ironing itself out. As a Bay Area bankruptcy lawyer I wish I could say there will not be quite a few foreclosures and short-sales this coming year, but there will be. There are even adjustable rate mortgages that are adjusting up let alone those who have watched the value of their homes decrease by one hundred thousand dollars or more the last few years. Relief from taxes on the cancellation of debt resulting from a foreclosure or short-sale is still necessary and is absolutely relief.