Monthly Archives: December 2013

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, Inc. 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’s Bankruptcy Attorneys 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 $22,500. The motion further provides that Super Pig Entertainment, LLC, is a company owned by one of the co-founders of Juno Baby, Inc. At the time of the bankruptcy of Juno Baby, Inc. the co-founders did not own the corporation anymore. The original co-founders sold Juno Baby, Inc. in 2009. 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 [Juno Baby, Inc.], 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, Bankruptcy 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.

Can a Filing Deadline be Extended Due to an Attorney’s Computer Problems?

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You cannot make real life up. I had to do a double take on this one. The moral of the story here is why wait until later to do what you can do now? Why put it off? This case represents a harsh result for missing a deadline due to alleged computer problems. Unfortunately the bankruptcy lawyer in this Ninth Circuit Court of Appeals case, Amina Anwar v. D. Johnson, Case No. 11-16612, waited until the last minute, allegedly had computer problems and then filed his documents with the bankruptcy court electronically about an hour late. The original bankruptcy case was filed in Arizona.

This case is really about the harsh effect of Federal Rule of Bankruptcy Procedure 4007(c), the timing for filing a complaint under Section 523(c) to object to the dischargeability of a debt. The Ninth Circuit Court of Appeals starts off with some quotes: Douglas Adams: “I love deadlines. I love the whooshing sound they make as they fly by;” Benjamin Franklin: “You may delay, but time will not.”

Once a person files for bankruptcy and creditors receive proper notice of the case even debts incurred by fraud are discharged unless the creditor timely files a lawsuit to determine whether the debt is dischargeable or not. FRBP 4007(c) provides for the time limit to object to discharge as 60 days from the first date set for the Section 341 meeting of the creditors. Like most Federal Bankruptcy Districts the Arizona bankruptcy court has established a mandatory electronic filing system. In the days before electronic filing a bankruptcy attorney did not have until midnight on the day set for a deadline. In this case the deadline to file an adversary complaint objecting to the discharge of a debt was April 13, 2010.

Anwar is the creditor and D. Johnson is the debtor that originally filed for bankruptcy protection. Anwar’s attorney did not start the process of opening an adversary case and file the adversary complaint until 9:00 p.m. on April 13, 2010. Allegedly due to technical problems with Anwar’s lawyers computer the lawyer did not file the adversary complaint until 12:24 a.m. and 12:38 a.m. on April 14, 2010. Oops. The debtor, D. Johnson, filed a motion to dismiss the complaint because it was not filed timely. The Federal Rules of Bankruptcy Procedure provide the deadline to file an adversary complaint can be extended after notice, a hearing and for cause, but the motion must be filed before the deadline. For Anwar’s complaint to be allowed the court would have to give Anwar a retroactive extension of the deadline to file the adversary complaint.

The bankruptcy court originally held that the Federal Rules of Bankruptcy Procedure do not provide the court with discretion to extend retroactively the deadline to file an adversary complaint. Fed. R. Bankr. P. 4007(c) is not like other deadlines that can be extended for excusable neglect pursuant to Fed. R. Bankr. P. 9006(b)(1). Fed. R. Bankr. P. 9006(b)(3) provides that bankruptcy courts may extend the deadline under FRBP 4007(c) only to the extend and under the conditions stated in FRBP 4007(c).

This is truly an unfortunate result for a delay in filing documents within an hour of the deadline. The Fed. R. Bankr. P. are clear regarding FRBP 4007(c). The court will make no exceptions if the deadline to file an adversary complaint to determine the dischargeability of a debt.

Can a Lien be Stripped if Only One Spouse Files for Bankruptcy?

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In California, as part of the Ninth Circuit, the answer should be yes. The main distinction here is that California is a community property state. There are decisions from of circuits that contradict the decision discussed below. California is a community property state and both spouses are assumed to have command and control of community property assets. So why can a wholly unsecured or underwater lien be stripped if only one spouse files for bankruptcy?

The scenario is that a couple buys a house during marriage and therefore the presumption is the house is a community property asset. To be clear, there is no evidence to rebut this community property presumption because there is no evidence the funds used to purchase the house, pay the mortgage, insurance or property tax came from any separate property source. If there is any question as to whether the house is not community property be careful. So in this discussion the house is clearly a community property asset when filing for bankruptcy protection. Pursuant to Section 541(a)(2)(A) or (B) of the Bankruptcy Code all interests of the debtor and debtor’s spouse in community property as of the commencement of the case that is under the sole, equal, or joint management and control of the debtor; or liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

If the provisions of Section 541(a)(2)(A) or (B) are met then the community property of both spouses becomes property of the estate when one spouse files a bankruptcy petition. See In re Miller, 167 B.R. 202, 205 (Bankr.C.D.Cal. 1994). This issue was addressed in In re Maynard, 264 B.R. 209 (9th Cir. BAP 2001). In Maynard, Lillian B. Maynard filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code and sought to strip off a wholly underwater mortgage from her real property. Her spouse did not file with her. Maynard’s bankruptcy attorneys filed a motion to value the property and eventually an order was entered ordering that the creditor’s claim is stripped as an encumbrance against Maynard’s real property and shall hereinafter be treated as a general unsecured claim pursuant to Maynard’s Chapter 13 Plan.

The creditor appealed various rulings of the lower bankruptcy court including whether the lien could be stripped given Maynard’s husband did not file for bankruptcy as well. The 9th Circuit Bankruptcy Appellate Panel held that under California law each spouse has an equal right to manage community property. Lawrence P. King et al., COLLIER FAMILY LAW 4.03[3][c] (Rev. 2000). Therefore, the real property of the nondebtor or non-filing spouse is included in the filing spouses or debtor’s estate and a creditor’s entire lien is subject to valuation and avoidance pursuant to Section 506(d) of the Bankruptcy Code.

If a fractional interest becomes property of the bankruptcy estate be careful. Bankruptcy lawyers should research how the property was purchased and how title of the property was taken at the time of purchase. The whole interest in the property the lien is trying to be stripped from must be part of the bankruptcy estate.