Harvey Miller, the heavyweight champ of bankruptcy lawyers, has been defending his title this week in court, urging a federal judge to OK the sale of his client General Motors Corp. to a company led by the U.S. government.
But his performance in an earlier, much smaller, bankruptcy case demonstrates why Miller is the person big companies want to have in their corner. Not long after Miller re-entered the legal arena after a stint in investment banking, Inyx USA filed for Chapter 11 protection, with Westernbank Puerto Rico hot on its heels.
Long time Bankruptcy Beat readers may remember Inyx USA, a pharmaceutical outfit run by Jack Kachkar. A man who has run a number of pharmaceutical enterprises, Kachkar had the misfortune of squaring off against Miller after he returned to ring in 2007.
Two years later, the trustee running Inyx USA’s Chapter 11 case sued Kachkar and other former leaders of the company, seeking money to cover the unpaid bills. This week’s trustee suit is tame compared to the bare-knuckles bankruptcy tactics Miller used in Inyx’s case.
Maybe Miller was just well rested, or maybe he was charged up by the scent of blood in the water from Kachkar’s fight with Westernbank Puerto Rico. But the 70-something attorney did battle like little Inyx’s case was that of, say, Lehman Brothers or General Motors Corp.
To recap: Miller client Westernbank Puerto Rico suspected that Kachkar had duped the bank into making $140 million worth of loans Inyx could never repay. Kachkar has always denied wrongdoing.
Miller railed against the alleged fraud perpetrated on Westernbank. He offered Inyx dirt-cheap bankruptcy financing on the sole condition Kachkar be banished. He ran search-and-seizure operations in Canada and Puerto Rico, dispatching bank auditors to grab computers, lock up offices and poke through shrink-wrapped piles of goods in search of hidden documents.
It was a far cry from the “let’s make a deal” climate then prevalent in Chapter 11. Inyx attorney Samuel Israel, whose specialty is courtroom brawling, Thursday recalled it as “knock-down drag-out litigation.” He is with the firm of Fox Rothschild.
Miller even engineered a mid-Chapter 11 corporate coup premised on the possession of a single share of stock. Then he ousted Kachkar and the rest of Inyx’s board of directors. “Inyx USA was a one-share company, and we have the one share,” Miller told Judge Kevin Gross during a courtroom debate.
All that was just the first month(!) of action after Inyx filed for “protection” from creditors, like Westernbank, for example. It was all legal, accomplished under the shield of court orders or permissible because of the involvement of company units that were not under Chapter 11 protection, Miller said. No one ever proved anything different.
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WSJ.com: Bankruptcy Beat
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If Miller Is In The Ring, It’s Not A Small Bankruptcy Case
Posted: July 2nd, 2009, 1:59pm PDT
BankThink
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July 6-10: Sketches of a new landscape
Posted: July 2nd, 2009, 1:34pm PDT by Emily.Flitter
This week, Congress is back in session and the financial regulatory committees will be hard at work on a system overhaul. Thrown into the mix is a new set of rules governing private equity investments in failed banks, put out to comment by the Federal Deposit Insurance Corp.
Monday
The FDIC will hold a roundtable to discuss its proposal for new rules to govern private equity investments in failed banks. The agency declined to release a list of participants.
Wednesday
The Senate Banking Committee will hold a hearing at 2pm on ”the effects of the economic crisis on community banks and credit unions in rural communities.” Witnesses include Independent Community Bankers of America representative Jack Hopkins, the CEO of CorTrust Bank, N.A. in Sioux Falls, S.D.; Credit Union National Association representative Frank Michael, the CEO of Allied Credit Union in Stockton, Calif.; American Bankers Association representative Arthur Johnson, the CEO of United Bank of Michigan in Grand Rapids; and Peter Skillern, the executive director of the Community Reinvestment Association of North Carolina.
Thursday
The House Financial Services Committee will hold a hearing on new legislation, the Tarp for Main Street Act of 2009. No witnesses have been announced. Later, the committee will convene a 2pm hearing on balancing the Federal Reserve’s monetary policy duties with a potential systemic risk regulatory role. The committee has not yet released a witness list.
Friday
At 10am, Treasury Secretary Timothy Geithner will testify before a joint hearing held by Financial Services and the House Agriculture Committee on regulating derivatives. The hearing will take place in the Cannon building, room 345.
WSJ.com: Bankruptcy Beat
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Financial Woes Have Coyotes Signing Discount Players
Posted: July 2nd, 2009, 12:32pm PDT
The National Hockey League’s free-agent signing frenzy began this week, and the big-market Chicago Blackhawks and New York Rangers are throwing eight-figure contracts at superstars Marian Hossa and Marian Gaborik.
Meanwhile, the Phoenix Coyotes, who are operating under Chapter 11 bankruptcy protection, are shopping in the discount section.
Among the Coyotes’ significant signings is goalie Jason LaBarbera, who won just eight of 24 games last season for the Los Angeles Kings and Vancouver Canucks. The team also netted aging journeyman defenseman Adrian Aucoin.
Although terms were not disclosed, neither signing is expected to stretch the Coyotes’ budget too much. Last year, the money-losing team spent about $43 million on its roster, more than $10 million below the maximum NHL teams are allowed to spend.
Finances this year may be even more closely scrutinized as a battle over who will own the team, and where the Coyotes will play, happens in bankruptcy court.
Coyotes General Manager Don Maloney conceded he’d like to have the same money to spend as the league’s more prosperous team, but at this point, he’s limited.
“We’re not going to be able to go out and grab that scorer who is an All-Star,” Maloney told The Associated Press this week. But, “there’s enough room in this budget to put a good team on the ice, and to continue to get better.”
The Coyotes, who have never turned a profit since moving to Arizona from Winnipeg, filed for bankruptcy in May after majority owner Jerry Moyes refused to backstop the team’s losses.
Moyes sought to sell the team to BlackBerry mogul Jim Balsillie, who would move the Coyotes to Canada, but the NHL is backing a rival bid that would keep the team in suburban Phoenix.
Total Bankruptcy
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Student Loans Begins for Some in July
Posted: July 2nd, 2009, 11:55am PDT by meaghano
If you’re among the hundreds of thousands of recent college graduates with significant student debt hanging over your now degree-laden head, good news: A new program called Income-Based Repayment may help you tame the debt monster.
What is Income-Based Repayment (IBR)?
IBR is a program introduced by the government in 2007; however, its full effects don’t start until July 1st – which is perfect if you’re a recent grad. Essentially, the program was designed to make sure that graduates who aren’t making the big bucks right after graduation aren’t spending all their earnings on repaying student loans.
IBR can help with people who meet the following criteria:
- Have loans (to students, not their parents) from either the Direct or Guaranteed (FFEL) loan programs or (most) government-funded loans
- Have enough debt to qualify. Specifically, have debt that would require you to spend more than 15 percent of your income in excess of 150% of the poverty level to pay off your loans in ten years – calculator available here
Interest Rates for Adjusted Loans
While the IBR program may make your monthly payments more affordable, it could also mean that your monthly payments don’t cover your full interest rates. This means that:
- For federally subsidized loans, the government would pay the remaining interest for the first three years
- For non-subsidized loans, the unpaid interest would be tacked onto the principal amount you owe
The second option may mean you end up paying more in the long term, but if your earnings increase over the years, this likely won’t be too big a problem. Plus, the IBR program has the unique caveat that any amount still due after 25 years is forgiven.
What is Public Service Loan Forgiveness?
It’s the other loan forgiveness program taking full effect this month, and it’s designed to help those who work in certain so-called public service jobs, including those for the government and nonprofit 501(c)(3) organizations.
If your job qualifies under this program, your loans may be forgiven in full after 10 years of work (during which time you make normal loan payments). And, if your salary qualifies you for IBR loan payments while you’re working, you can still use that program to make payments more affordable.
To find out whether your employment situation may qualify you for help with student loans, visit this website [www.ibrinfo.org].
Bankruptcy Law Network - Real Lawyers, Real Solutions
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Keeping mum about discharging taxes in bankruptcy
Posted: July 2nd, 2009, 9:50am PDT by Cathy Moran, California Bankruptcy Lawyer
The client owes a fistful of taxes from years ago and has spent another fistful of dollars with widely advertised outfits that solve your tax problems. None of these tax professionals told him that old income taxes can be eliminated in bankruptcy.! The client first hired J K Harris, with no results, except a lighter wallet. [...]
Credit Slips
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Bankruptcy as a Disqualifying Factor for Child Custody?
Posted: July 2nd, 2009, 8:21am PDT by Bob Lawless
Several sources, including our friends over at Bankruptcy Beat, are reporting that Michael Jackson's mother, who has been awarded temporary custody of her three grandchildren, might have trouble gaining final custody because of a 1999 bankruptcy filing. Washington attorney Beth Kaufman is quoted as saying, "I think it would be a negative factor but not necessarily a disqualifier. It could indicate that she is not capable of sound financial management.”
It is often said that bankruptcy experts and family law experts don't know know as much about the other field as we should. That is certainly true for me, but I was surprised to read that a bankruptcy filing could be a negative factor for a family law court deciding a child custody matter. The Bankruptcy Code prohibits discrimination against former bankrupts, but that prohibition applies only in specific situations such as certain state licensing decisions or in employment matters. It would not prohibit a state court from considering a bankruptcy filing in a child custody matter. Still, on the question of fitness to be a parent, an old bankruptcy filing would seem to have little relevance.
Sure enough, Ms. Kaufman is right--there are cases where a family law court cites a party's inability to engage in sound financial management as a factor in a child custody decision. In some of those cases, the family law court refers to a bankruptcy filing as evidence of the party's financial instability. It seems clear from these cases that it is not the bankruptcy filing that causes the problem, but the general inability to manage one's financial affairs that concerns the courts. A ten-year old bankruptcy filing, standing alone and without more evidence of recent financial problems, would not fit this description.
All of this reminds me of an important point that often can be overlooked when talking about bankruptcy. When thinking about a person's financial well-being, a bankruptcy filing is not the problem. Rather, it is a manifestation of other underlying problems. If you don't fix the underlying problems, a bankruptcy filing is not going to help in the long-run. Applied to the child custody situation, it is not the bankruptcy filing but the underlying financial problems that should concern a family law court. Someone who has used bankruptcy to help put their financial problems behind them should not have to fear the bankruptcy filing will be used against them in a child custody case several years later.
WSJ.com: Bankruptcy Beat
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The Daily Docket: Lear To Enter Chapter 11
Posted: July 2nd, 2009, 7:08am PDT
Automotive seat maker Lear Corp. has reached a restructuring deal with its lenders and plans to enter Chapter 11 protection soon, The Wall Street Journal reports.
The Big Three auto makers had the smallest decline in monthly auto sales this year, WSJ reports.
According to WSJ, General Motors Corp. will file an initial public offering of stock shares in 2010.
Crabtree & Evelyn Ltd., which sells perfumed soaps, lotions and other personal-care products at 126 stores across the country, sought bankruptcy protection Wednesday with plans to shutter some of its underperforming locations. Read the Daily Bankruptcy Review story here.
A bankruptcy judge on Wednesday rejected Delphi Corp.’s request to reimburse up to $30 million of its proposed buyer’s expenses should another bidder acquire the auto parts maker’s assets. Read the DBR story here.
Alex Yemenidjian, the new owner of the Tropicana Las Vegas, has vowed to return the hotel and casino to its former glory, according to the Las Vegas Review Journal.
» Long Island, New York | NY | Bankruptcy Lawyer | Attorney At Law
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Consumers with Solid Mortgages Facing Foreclosure
Posted: July 2nd, 2009, 1:30am PDT by Craig
Written by Craig D. Robins, Esq.
Even the least-risky mortgages are seeing a drastic increase in delinquencies as consumers are being laid off
According to data just released by the Office of the Comptroller of the Currency, first-time foreclosure filings on prime mortgages more than doubled over the past year. Now 2.9% of all prime mortgages are in default.
Prime mortgages are those that are considered least risky. About two-thirds of all U.S. mortgages are prime mortgages.
It appears that mounting job losses are pushing more and more borrowers towards foreclosure. Even consumers with good credit are finding it difficult to make monthly payments when their income has decreased.
Here on Long Island, consumers who have held the same job for well over a decade are being laid off. Depending on the particular facts, a bankruptcy filing may be the easiest and most efficient way to deal with the situation.
.
If a house is upside-down with no equity, now may be the time to walk away, rather than be a hostage to your home. Under the right circumstances, a bankruptcy filing can provide that option.
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Credit Slips
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The Case for a Consumer Financial Protection Agency
Posted: July 1st, 2009, 7:42pm PDT by Adam Levitin
Yesterday, the White House released proposed statutory languagefor the creation of a Consumer Financial Protection Agency (CFPA). The bill is long, but the CFPA, the brainchild of our co-blogger Elizabeth Warren, is by far the boldest part of the Obama financial restructuring plan. I’d also venture to say that it is the most important.
In this post I want to underscore why we need a CFPA. In future blog posts, I hope to come back to what a CFPA will and won’t do.
Simply put, we need a CFPA because the current regulatory structure doesn’t work and it will almost inevitably cause future crises, if not of the scale of the current one, then still too serious to countenance.
The economic disaster of 2008 is the chief exhibit in showing that the current system doesn't work. There were many factors behind the economic disaster, but bad consumer credit products were an important factor. A major lesson from this crisis is that consumer debt can affect global economic stability (no surprise as consumer spending is something like 70% of GDP).
Unfortunately, the market drives the introduction of bad consumer credit products. Credit is at core a commodity. A dollar from Chase is no different than a dollar from Bank of America. The only way high-cost products that skim consumer surplus are able to compete in the credit market is through price obfuscation. Some of this obfuscation is through fine-print. Some is through product design, as complexity and exploitation of consumers’ cognitive biases can mask pricing. Credit cards have led the way with price obfuscation, but mortgages made up the gap, and other products are not far behind. Basically, the consumer credit market is a market in which competition often encourages bad products, and this calls for regulatory intervention.
We have a regulatory system for consumer financial products in place, but the current regulatory structure doesn’t work for three reasons. First, it fractures consumer protection in financial services over multiple agencies. Second, it couples consumer protection with an incompatible mission, bank safety-and-soundness regulation. And third, there is a lack of centralized expertise on consumer financial products in the federal government.
In the current regulatory structure, consumer protection is an orphan. Consumer protection in financial services is divided among five federal banking regulatory agencies, the FTC, the Department of Justice, and 50 states (with banking regulators and attorneys general). And that’s just for banking services (credit, deposit-taking, and payments). It doesn’t count the additional regulators for securities, commodities, and insurance.
This fractured system is rife with opportunities for regulatory arbitration by financial institutions, and makes coordination between agencies a major challenge. The essential nature of the consumer financial services market is hydraulic—regulating one sort of institution or product will merely shift business to another sort of institution or product. For example, stricter limits on payday loans could well result in a boom in auto title loans. When agencies have authority over only a part of the consumer financial services market, they are often loathe to regulate lest they just push the problem—and the business—into another agency’s bailiwick.
Among the alphabet soup of agencies that have consumer protection duties in financial services, there is only one whose primary mission is consumer protection: the FTC. The FTC, however, only has jurisdiction over fringe players in financial services; it has almost no authority over banks or thrifts or credit unions. For the other regulators, consumer protection is thrown in with other missions, and it has often been an afterthought. The key problem for federal banking regulators (Fed, OCC, OTS, FDIC, NCUA) is that they are charged with ensuring bank safety and soundness. A bank cannot be safe and sound without being profitable, and abusive and exploitative lending practices are frequently quite profitable (there’s no other reason to engage in them). If a regulator cracks down on an abusive lending practice, it might endanger its regulatory charge’s safety and soundness. The result has been that consumer protection almost inevitably takes a back seat to safety and soundness.
The fracturing of consumer protection in financial services has also inhibited the federal government from building up expertise in the area. There are many able staffers at various federal agencies who study consumer finance, but their dispersion limits their effectiveness. It also limits their ability to collect data. Data is the lifeblood of consumer finance regulation, but the federal government knows shockingly little about mortgages or credit cards or payday loans, for example. To provide a simple example, the federal government does not know with any precision the volume of credit card debt outstanding. The Fed tracks revolving debt, but that includes bank account overdrafts and other revolving lines. Likewise, the federal government lacks detailed knowledge about credit card terms and pricing. In order to gauge the impact of regulations, that sort of knowledge is essential, and a major reason the federal government doesn’t have the sort of knowledge is that there is no single regulator with a field-wide purview.
Creating a CFPA would solve the fractured authority problem, would solve the conflicting missions (a/k/a motivation) problem, and would become a locus of knowledge and expertise on consumer credit that would allow for better and more efficient regulation. It would provide an important bulwark against abusive consumer finance products and practices not just for the next few years while the memory of the current crisis is still fresh, but well beyond the memory horizon. It might not be failsafe (no regulatory regime is), but the current regulatory system can also be guaranteed to keep producing bad consumer financial products, and that’s something America can’t afford.
Total Bankruptcy
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Devastating Effects of Medical Debt
Posted: July 1st, 2009, 1:45pm PDT by meaghano
DrSteveB over on Daily Kos has a sobering look at that dramatic ways in which uncontrollable medical bills can change a life.
DrSteve gives us the tale of a man in Texas who was living his dream - married, owned his own company, had health insurance - until a car accident radically altered his life and left him homeless.
The medical bills quickly blew past what his insurance would cover. The owner and driver of the other truck did not have insurance, like 10-20% of vehicle owners despite the mandate to buy auto insurance, so Mr. Benson and his insurance company were unable to go after that source.
I’ve been doing some research on medical debt and bankruptcy lately, and this story was heartbreaking. Sadly, it shares much in common with many of the people who run into serious financial problems following an illness or injury.
Medical bills can quickly become overwhelming, even for the insured. If you need serious health care, the financial fallout is often more than just another bill.
Many people lose significant work time because of illness or injury. The new bills and loss of income may put strains on their mortgage or lead to an increased reliance on credit cards, which can also get out of hand quickly.
Fortunately, DrSteve’s story has a happy ending:
Eventually, he wound up in a shelter, and eventually he was able to put his professional chef skills to work in the “soup kitchen.” From that he has worked his way back to sobriety, fulltime employment and housing.
If you’re facing severe medical debts, don’t wait to take action. If you need to get your debt under control, know that help is available.
WSJ.com: Bankruptcy Beat
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When You Wish Upon A Star
Posted: July 1st, 2009, 1:02pm PDT
Jim Justice, the new owner of the Greenbrier resort, is reaching for the stars – five, to be exact.
Justice, who took control of the historic West Virginia hotel in a May stock purchase, is on a mission to regain the coveted five-star Mobil Travel Guide rating the resort once enjoyed. And he means business. According to the Associated Press, Justice has brought in the big guns – Mobil Travel Guide’s own consulting team – to “help identify the resort’s strengths and weaknesses.”
“It’s a prep course before the test,” Mobil Travel Guide Chief Executive Shane O’Flaherty told the AP.
Justice is also hoping to get in some extra cramming in the form of super-motivated employees. They’re likely to be devoted to the cause, considering Justice promised them a 10% bonus if they make the grade.
This isn’t Greenbrier’s first attempt to regain five-star status. After losing its fifth star in 2000, the Greenbrier embarked on a $48 million renovation campaign designed to help it recapture the honor. But the substantial capital expenditures failed to net the hotel its desired prize and instead helped to plunge the company’s finances into disarray.
“While these efforts were essential to maintain the status of the Greenbrier as a world class resort, they proved untimely given the unforeseen credit and financial crisis,” Greenbrier said in court documents accompanying its original bankruptcy petition.
Mobil hand-picks its five-star hotels by sending out “Incognito Hotel Inspectors” who judge the locales based on 550 criteria. This year, 44 hotels in the U.S. received five stars, while 137 others obtained four stars. The five-star hotels boast amenities like personal butlers, doggie-bed turndown service and pillow menus featuring 14 different kinds of pillows.
Credit Slips
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In the Home Stretch
Posted: July 1st, 2009, 11:43am PDT by Bob Lawless
Note: The following was just sent from Credit Slips blogger Stephen Lubben: "At the GM hearing, although closing arguments may run over to tomorrow. I don't think there has been anything thus far that would prevent the sale from going forward."
WSJ.com: Bankruptcy Beat
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Custody Of Jackson Children May Be Marred By Bankruptcy Filing
Posted: July 1st, 2009, 10:01am PDT
Associated Press
Things may not go as easy as 1-2-3 for the mother of late pop icon Michael Jackson, whose will is reportedly said to leave custody of his children to his mother.
According to the Associated Press (via the Morning Call), Jackson’s will was to be filed in Los Angeles on Wednesday, and a person with knowledge about the document said it gives custody of Jackson’s three children to his mother. But trying to gain final custody may not be a thriller, because Katherine and Joe Jackson filed for bankruptcy protection in 1999.
Experts say Jackson’s parents’ personal bankruptcy could work against Katherine Jackson getting control over her son’s children and estate in the long run. According to court documents, the Jacksons entered Chapter 7 protection listing almost $24 million in debts. RadarOnline reported that the Jacksons owed more than $34,000 on a 1994 Mercedes, more than $60,000 on a 1998 Land Rover and more than $36,000 on a Land Rover Discovery. They also owed about $150,000 in income taxes to the state of California and the IRS, and they owed more than $20 million in two lawsuit judgments. The bankruptcy ended in March 2007.
Beth Kaufman, a Washington attorney who deals with estate tax issues, told the AP that the bankruptcy filing may hurt Katherine Jackson’s attempt to gain final custody. “I think it would be a negative factor but not necessarily a disqualifier,” she said. “It could indicate that she is not capable of sound financial management.”
On Monday, Katherine Jackson was granted temporary custody of her son’s children by Judge Mitchell Beckloff as a response to documents by the Jackson family saying Michael Jackson died without a valid will. Beckloff also gave her temporary guardianship over her son’s personal property.
BankruptcyProf Blog
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Circuit Court of Appeals Cases from Last Week
Posted: July 1st, 2009, 8:57am PDT by Bankruptcy Prof
9th Circuit Court of Appeals, June 25, 2009 Batlan v. Bledsoe, --- F.3d ---, 2009 WL --------------- (9th Cir. 2009)(trustee must allege and prove "extrinsic fraud" to establish fraudulent conveyance included in dissolution judgment) 9th Circuit Court of Appeals, June... -
Secured Debt When Converting from 13 to 7
Posted: July 1st, 2009, 8:32am PDT by Bankruptcy Prof
From the Bankruptcy Roundtable List Serve: We have a scenario where our clients filed a chapter 13 bankruptcy back in 2007. Since the filing, the debtors have separated, making them now eligible for conversion (given the separate living expenses). 1)...
Bankruptcy Law Network - Real Lawyers, Real Solutions
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Today, I am Reviewing the Claims File from my Client’s Chapter 13
Posted: July 1st, 2009, 7:56am PDT by Jonathan Ginsberg, Atlanta Bankruptcy Attorney
Several years ago, the Chapter 13 trustees and the bankruptcy judges in the Northern District of Georgia added a new administrative burden to lawyers who file Chapter 13 cases in the Atlanta area. Under this local rule, within 30 days after the “bar date” for creditors to file claims, lawyers must review all of the [...]
A Texas Bankruptcy Lawyer's Blog
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Fifth Circuit Allows Ownership Expense on Paid For Vehicle
Posted: July 1st, 2009, 7:23am PDT
The Fifth Circuit has held that a debtor may claim an ownership expense on the chapter 7 means test even if the debtor does not have a loan or lease payment. In re Tate, No. 08-60953 (5th Cir. 6/10/09). In the Tate case, the debtors owned two paid for vehicles. If they were allowed to claim a vehicle ownership expense under the means test, their monthly disposable income was $137.66, just under the threshold of $166.67 where their case would be deemed to be abusive. A Bankruptcy Court in Mississippi dismissed the case on the Trustee's motion, a decision which was upheld by the District Court.
However, when the matter reached the Fifth Circuit, the Court concluded that "the debtors should have been able to deduct the transportation ownership deduction under the plain language" of the statute. The Fifth Circuit noted a split between courts following the "plain language" approach and the Internal Revenue Manual test. The Court described the two approaches as follows:Both approaches start from the text of the statute, which states in part, "The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards." (citation omitted). The approaches differ, however, in how they read the word "applicable" in the above sentence.
Courts following the "plain language" approach read the word "applicable" to refer to the selection of an expense amount from the Local Standards that relates to the geographic area in which the debtor resides and the number of vehicles the debtor owns. (citation omitted). Under the plain language approach, the vehicle ownership deduction that "applies" to a debtor is the one that corresponds to his geographic region and number of cars regardless of whether that deduction is an actual expense. (citation omitted). . . .
Courts following the IRM approach conclude that the vehicle ownership deduction is not allowed if the debtor has no debt payment. These courts reach this result by reading the word "applicable" to modify "monthly expense" amounts so the debtor can deduct this expense if he has a "relevant" ownership expense. (citation omitted). In other words, under this approach, if the debtor has no debt or lease payment related to a vehicle, he cannot take the ownership deduction because it is not applicable or relevant to him. This interpretation is called the IRM approach because the courts following it use the methology of the IRM as an interpretive guide for applying the means test. (citation omitted). Under this approach, courts look not only to the Local Standards but also to how the IRS uses the Local Standards in its revenue collection process. Under the IRM, if a taxpayer has no car payment, the taxpayer is only entitled to the vehicle operation expense, not the ownership deduction.
Opinion, pp. 4-5.
In adopting the plain language approach, the Fifth Circuit sided with the Seventh Circuit, which is the only other circuit court to address the issue. In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008).
As I see it, the plain language approach is preferable for at least three reasons. First, it is always best to follow the plain language of the statute. Any time that courts bend a statute to arrive at the result that Congress may have intended, they stray into legislating rather than judging. Second, following the Internal Revenue Manual poses a separation of powers issue. While it is bad enough that BAPCPA relies on a standard promulgated by the executive branch to determine eligibility for bankruptcy, at least the National and Local Standards purport to be based on objective factors. However, allowing the IRS to shade those standards through the IRM effectively allows an executive branch agency to amend the statute, which is an obvious problem. Finally, allowing an ownership expense recognizes reality. A car is a depreciating asset. Even if a debtor does not have a debt payment, the trade-in value of the vehicle is going down. Thus, a prudent debtor who does not have a car payment would still be saving for the downpayment on a replacement vehicle. Allowing an ownership expense only for debtors with a car payment penalizes the debtor who keeps a car for the long term as opposed to the person who trades for a shiny, new car every year.
Credit Slips
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Health Insurance to Go Broke With
Posted: July 1st, 2009, 7:17am PDT by Bob Lawless
An article in today;s New York Times chronicles how medical debt can financially ruin U.S. citizens even with health insurance. Policies with limits, often hidden from the consumer, quickly run out and leave the insured with mounds of debt. This story comes on the heels of an academic study by Credit Slips bloggers Debb Thorne and Elizabeth Warren and their co-authors, David Himmelstein and Steffie Woolhandler, showing an increase between 2001 and 2007 in the number percentage of medically related bankruptcies. I sometimes wonder how persons reading from outside the U.S. react to these sorts of stories.
WSJ.com: Bankruptcy Beat
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GM Seeks To Sell Itself To U.S.
Posted: July 1st, 2009, 7:07am PDT
According to The Wall Street Journal, General Motors Corp. went to court Tuesday to try to persuade a judge to give it the OK to sell itself to the U.S. government, which can walk away if the deal isn’t approved by July 10.
Lear Corp. may enter Chapter 11 protection as soon as Wednesday, the Detroit News reported.
Ruth Madoff, the wife of Bernard Madoff, won’t get prosecuted for the Ponzi scheme that got her husband sentenced to 150 years in prison, the New York Post reported.
Private-equity firm Apollo Management LP got court approval to reorganize plastic packaging maker Pliant Corp. over the company’s opposition, Bloomberg reported.
Visteon Corp., which moved last week to cut off retiree health-care benefits, has asked a bankruptcy judge to authorize up to $80 million in management and insider bonuses. Read the Daily Bankruptcy Review story here.
Total Bankruptcy
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Financial Problems Haunt Former Pro Athletes, Too
Posted: July 1st, 2009, 6:00am PDT by meaghano
USA Today has the nicely titled “Tough Losses” piece on former athletes that were also savvy business investors, but have nonetheless struggled in the recent economy.
You’re probably familiar with the tales of atheletes wasting their millions on lavish extravagances. Jason over at Automatic Finances has a great post that pulls some practical advice from athletes tales of money mispent on bad investment and shady “financial managers.” But what’s scary are these stats:
78% of retired NFL players are bankrupt within 2 years. For NBA players, 60% are broke within 5 years of retirement.
However, the athletes profiled by USA Today aren’t in this mold. Take Hall of Fame defensive lineman Willie Davis. He played for Vince Lombardi in the days before million-dollar contracts.
The now-73-year-old managed his money wisely - at one time, his banking investments were worth millions - has scene his fortune dwindle because of the housing bust. Former New Orleans Saints running back Deuce McAllister owned a Nissan dealership that was forced to file for bankruptcy.
These tales are reminder that even smart investments can turn sour for even smart businessmen. Financial pitfalls could befall anyone, even if you’ve saved for a rainy day or watch your budget closely.
Just remember: If you find yourself in rocky financial waters, know that you do have options, and there is help available.
Bankruptcy Law Network - Real Lawyers, Real Solutions
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US Health Care Financing System is Broken - Most Bankruptcies Due To Medical Debt
Posted: June 30th, 2009, 8:45pm PDT by Peter Orville, Attorney at Law
“The US health care financing system is broken, and not only for the poor and uninsured” According to a recent study in The American Journal of Medicine, middle-class families are collapsing under the strain of “a health care system that treats physical wounds, but often inflicts fiscal ones”. The study, (http://pnhp.org/new_bankruptcy_study/Bankruptcy-2009.pdf) claims that 62.1% of all bankruptcies filed [...]
theBKblog
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Can I Leave Selected Debts Out of my Bankruptcy Filing?
Posted: June 30th, 2009, 6:15pm PDT by Jonathan
I get this question at least once a week - "I need to file bankruptcy but I don't want to include my [mortgage] [car loan] [debt to my brother] [credit card co-signed by my company]. Let's leave this debt off my petition.
Sorry - can't do it. As [North Carolina bankruptcy lawyer Adrian Lapas] writes in his recent post in the Bankruptcy Law Network blog:
When you sign your bankruptcy petition, you are certifying to the United States Bankruptcy Court, under penalty of perjury, that the petition and schedules attached to it lists all of your assets and all of your debts. All means all! You do not get to pick and choose which debts you list in your bankruptcy case.
Not only must you include all of your creditors but you may also have to include other "interested parties." In the Northern District of Georgia, for example, the Chapter 13 trustee requires all debtors who are subject to child support orders to include the custodial parent as a priority creditor in their Chapter 13 petitions. Notice must be provided the custodial parent/child support recipient even if there is no arrearage.
Needless to say this requirement does not make child support paying debtors very happy because it means that their ex-spouse will know that the debtor has filed bankruptcy and will have ready access to the debtor's financial picture.
The big picture here: you lose a certain degree of control when you file bankruptcy, and you have to play by the rules. Details of your financial life become part of the public record and people like ex-wives, parents, bosses and friends may very well get notice of your filing and you can assume that some of these "nosy neighbors" will review your filing.
The Florida Bankruptcy Law Blog
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Leasing Portion of Homestead Land To Third Party Does Not Impair Exemption
Posted: June 30th, 2009, 6:01pm PDT by Jonathan Alper
I came upon another interesting court decision concerning Florida homestead. In this bankruptcy case a debtor owned a property in the county less than 160 acres. The debtor placed two mobile homes on the property. He lived in one mobile home and he rented the other mobile home and surrounding land to a third party for about $400 per month. Both mobile homes were attached to sewer and water lines. The debtor claimed the land and both mobile homes as exempt under Florida’s homestead provisions. The bankruptcy trustee objected to the exemption of that portion of the property used by the tenant and his rented mobile home. The bankruptcy judge overruled the objection and sustained the exemption of all of the debtor’s property.
The court noted that prior judicial decisions protected portions of homestead land used for the owner’s commercial purposes. Those cases did not address a situation where the owner rented part of the homestead land as well as a mobile home thereon. The bankruptcy court found that the debtor’s lease of part of his homestead property did not disqualify any part of his homestead exemption. The judge said that the result may be different if the homestead was located within a municipality because the Constitution limits the exemptions in a city to the owner and the owner’s family. The case is 08-3203-3F3 In re Oullette
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
Bankruptcy Law Network - Real Lawyers, Real Solutions
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“I’m Not Filing Bankruptcy On . . . “, and Other Misconceptions
Posted: June 30th, 2009, 4:52pm PDT by Adrian Lapas, Eastern North Carolina Bankruptcy Attorney
“I don’t want to file bankruptcy on my house!” “I don’t want to file bankruptcy on my car!” “I owe my mom some money but I don’t want to file bankruptcy on her!” Every bankruptcy attorney practicing in this country has heard these phrases or variations of them. The client wants to keep his home so he thinks [...]
WSJ.com: Bankruptcy Beat
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Lyondell’s CEO-To-Be Set To Rake In Millions
Posted: June 30th, 2009, 1:38pm PDT
Need some incentive to take the reins of a bankrupt company? Would $32 million do the trick?
It seems to be enough for James L. Gallogly, who is poised to become the new chief executive of Lyondell Chemical Co. The company is seeking permission to hire Gallogly, and, thanks to bankruptcy court rules, had to disclose the details of everything from his undergraduate education at the University of Colorado – go Buffs! – to his compensation.
Of course, we here at Bankruptcy Beat are more interested in the millions he’ll be racking up as CEO than in his student days in Boulder. According to court papers, that $32 million price tag includes a base salary of $1.5 million, a $2.5 million signing bonus to be paid within five days of approval of his employment and a performance-based bonus equal to up to 200% of his base salary. But let’s not forget the $25 million in stock options Gallogly is set to receive upon the company’s emergence from bankruptcy protection. Although, we hear that hasn’t worked out so well for some other executives.
A judge is set to consider approving Lyondell’s employment agreement with Gallogly at a hearing July 21.
Credit Slips
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Who Loses in Cuomo v. Clearing House?
Posted: June 30th, 2009, 12:08pm PDT by Bob Lawless
Adam Levitin already posted on this week's decision in Cuomo v. Clearing House Association where the U.S. Supreme Court struck down a regulation from the Office of the Comptroller of the Currency's (OCC). The regulation preempted state enforcement of consumer protection laws against national banks and grew out of subpoenas issued by the New York attorney general. At first blush, the opinion seems to be a big victory for consumers, and it certainly is a victory. As alluded in the comments to Levitin's post, the opinion might not be as big of a victory as it seems.
The Court struck down the regulation but also refused to enforce the subpoenas issued by the New York AG because of the particular wording of the National Bank Act. I'll leave out the details. The Court seems to be laying down a bright line rule: a state attorney general can file a lawsuit to enforce consumer protection laws but can't issue subpoenas under its own administrative powers. That seems to cut back a lot on what state attorneys general can do. Without the ability to force the turnover of information during their own investigations, the power that Cuomo returns to state attorneys general might not help a whole lot. The only recourse the state attorneys general have is to file a lawsuit.
I wonder whether this bright-line rule might not backfire against the national banks. Might the default position of the state attorneys general not have to be "sue first, subpoena later?" Sure, a subpoena from the state attorney general is a giant pain in the posterior, but it certainly is better than a lawsuit from the state attorney general. If the effect of Cuomo is to compel the state attorneys general to sue in order to enforce state consumer law against the national banks, the banks might come to regret what they asked for.
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The Supreme Court and What Attorneys Can Say
Posted: June 30th, 2009, 10:37am PDT by Bob Lawless
Some other obligations have kept me away from blogging for the past few weeks. One great thing about a group blog is having great colleagues who pick up the slack. I had wanted to say a few words about the Supreme Court's June 8 decision to hear United States v. Milavetz. At this point, the Court's announcement is old news. This post is about what is at stake in the Milavetz decision and why Credit Slips readers might want to watch this case when it gets argued in the fall.
There have been several Credit Slips posts (here and here) about the lower court decisions in Milavetz. Some issues that were raised in the lower court decisions have dropped away, and before the Supreme Court, the case will involve section 526(a)(4) of the Bankruptcy Code, a provision added by the 2005 amendments. It provides that "a debt relief agency shall not advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for charge for services performed as part of preparing for or representing a debtor in a case under this title." Yes, that is language that perhaps only a lawyer could love but probably not even then. The upshot is that section 526(a)(4) aims to prohibit bankruptcy lawyers from advising clients to incur debt right before they file bankruptcy. It was not intended to prohibit bankruptcy lawyers from charging for their services, although that might be a natural reading of the language. Rather, the section also tries to prohibit lawyers from advising clients to borrow money to pay attorneys' fees for a bankruptcy filing.
These rules might seem to make a lot of sense. Why should attorneys be able to advise clients to incur debts that they intend to have immediately discharged in a bankruptcy case? The answer is simple--they shouldn't. Incurring debts that you have no intention of repaying is at best civil fraud and might even constitute criminal theft. Long before section 526(a)(4) was ever around, an attorney who advised clients to incur debts they had no intention of repaying was a party to fraud and a possible co-conspirator in a criminal act. In addition to possible professional disciplinary actions, numerous civil and criminal sanctions might have been imposed. Section 526(a)(4) was not really necessary and was part of the package of punitive provisions in the 2005 bankruptcy law against consumer debtors and their attorneys.
As a rule that tries to regulate what attorneys can and cannot say, section 526(a)(4) touches upon First Amendment free speech issues as well as due process considerations about access to legal counsel. Those are the issues the Supreme Court will consider. There are legitimate situations where an attorney might need to counsel a debtor to incur secured debt or nondischargeable unsecured debt before a bankruptcy case. It would seem beyond question that the First Amendment prohibits the government from passing laws that ban legitimate legal advice. A constitutional scholar once told me that her opinion was that section 526(a)(4) was "way unconstitutional" if applied in that way. I've always liked the "way unconstitutional" standard and wish it could be incorporated into our formal jurisprudence. I will be amazed if the Supreme Court lets section 526(a)(4) stand without cutting back on its scope.
One possibility is that the Court will interpret section 526(a)(4) only to ban advice that already was illegal. That is the route urged by the Solicitor General, the Department of Justice official who represents the United States before the Supreme Court and to whose opinion the Court often gives special weight. This is the outcome that I think is the most likely. There is no First Amendment right to commit fraud, and so construed, the statute should be constitutional. So construed, the statute also makes no practical changes to the law that came before it. Finally, the Court might strike down section 526(a)(4) entirely, on the theory that it is overbroad and might have a chilling effect on speech, an outcome that I think is possible but less likely.
Thus, I do not think Milavetz will have a very big practical effect on the advice given in bankruptcy lawyers' offices. Attorneys will not be entitled to give advice to commit civil fraud before or after the decision comes down. If others with a closer connection to the daily tribulations of a consumer bankruptcy practice see that point differently, the comments are open.
I am watching Milavetz for more symbolic reasons. The Supreme Court has not had a case that revolved around the harsher provisions of the 2005 bankruptcy law. Milavetz interests me not so much for the legal arguments in the case but because it might provide a window into how the Court perceives the 2005 bankruptcy law. Will the Court treat the law as just another congressional statute it has to interpret? Or will the Court see the law for the special interest legislation it was and interpret it with skepticism for its public-regarding claims? How the Court casts its opinion could be an important signal of how it will handle future issues that involve the 2005 law as well as an important signal to the lower courts on how to approach that particular statute.
WSJ.com: Bankruptcy Beat
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Freestyle Music Park Keeps Faith With Jackson Tribute
Posted: June 30th, 2009, 9:09am PDT
Following millions of others who are paying tribute to the late King of Pop, Freestyle Music Park has set up a memorial of its own.
The family-friendly musical theme park hosted a weekend of Michael Jackson tributes, including a memorial wall outside the park’s gates where fans were able to leave notes and write their thoughts, NBC’s affiliate in Myrtle Beach, S.C., reported. Freestyle also let fans leave flowers, candles and Michael Jackson memorabilia at the site.
The park offered other perks over the weekend to persuade patrons to pay tributes, such as $5 admission to anyone wearing a red, zippered jacket, white socks with dress shoes or a single white glove. Donations were accepted for the Make-A-Wish foundation, a charity Jackson has supported.
Freestyle, whose opening was heavily publicized due to its previous incarnation as the troubled Hard Rock Park, has been faced with lower attendance than owners had hoped for. Its former owner, HRP Myrtle Beach Holdings, entered Chapter 11 protection last September after just one season, citing the crashing economy and high gas prices. The case was converted to Chapter 7 in January. In February, the park was sold to FPI MB Entertainment, which reopened it on Memorial Day Weekend.
Total Bankruptcy
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Michael Couldn’t Beat It ~ The King of Pop’s Deflated Finances
Posted: June 30th, 2009, 8:21am PDT by meaghano
Jackson died this week while organizing a highly anticipated 50-night venue of shows at London’s ‘02 Arena.
It’s been a long-awaited return for Michael Jackson, as this would be his first concert in 8 years.
Jackson’s Curtain Call: The Comeback Concert that Will Never BeWhether the concert series was Jackson’s intent on returning to the music which gave him his glory, or if it were more of a financial life vest to keep Jackson and his entourage afloat, it’s certain his return was celebrated by his fans across the world.
In the course of Michael Jackson’s life and career he sold hundreds of millions of records and played in sold out arenas around the globe.
Jackson was a pop icon who gave us memories to last a lifetime.
With all this fame certainly came a fortune, so it’s plausible to assume that Jackson should of collected one of the largest fortunes in the entertainment industry in recent memory.
Sadly, this is not the case.
Due to faulty management and representation, excessive personal spending and surmounting legal bills, it’s rumored that Michael Jackson was facing bankruptcy.
Bankruptcy is BlindThe news of such financial distress came as both a shock and comfort to those in similar peril.
To know that an iconic person such as Jackson could be faced with the probability of filing bankruptcy made many feel they were not alone.
It also served as further proof that bankruptcy is not biased nor prejudice, it crosses all socio and ethnic borders.
The financial predicament which Jackson found himself navigating through was mostly due to the fact that Jackson’s camp continued to spend tens of millions of dollars a year even while his musical creation had been limited to his latest album in 2001.
In plain terms, his income did not meet his expenses, which is so often crisis which leads many into the bankruptcy fold.
To compound the issue, Jackson was faced with having to render himself to typical acts of desperation, which many do when in a similar situation, Jackson financed these personal debts by borrowing against assets and by some estimates his total borrowings at his death may have exceeded $500 million.
The iconic nature of Michael Jackson was not enough to ward off financial ruin.
As many others throughout the country are facing financial distress and the prospect of bankruptcy, there might be comfort in knowing the same man who will forever be known as the King of Pop, the creator of the ‘moon walk’ and owner of Never-Never Land was in the path of bankruptcy.
Bankruptcy Law Network - Real Lawyers, Real Solutions
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Are There Any Reasons NOT to File Chapter 7 Bankruptcy? Part 2-You May Not Discharge All Your Debt
Posted: June 30th, 2009, 7:22am PDT by Peter Orville, Attorney at Law
Although filing Chapter 7 bankruptcy usually wipes the slate clean as far as most of your debts are concerned, there are some debts that may not be discharged. Certain debts, such as most taxes, child or spousal support, and student loans usually survive the Chapter 7 discharge. Debts incurred through fraud, may also survive the discharge. And in [...]
WSJ.com: Bankruptcy Beat
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The Daily Docket: Madoff Victims Influence Sentencing
Posted: June 30th, 2009, 6:45am PDT
U.S. District Judge Denny Chin said victims’ statements and 113 letters filed with the court influenced his decision to give Bernard Madoff 150 years in prison, The Wall Street Journal reports.
On Tuesday, General Motors will ask the New York bankruptcy court to approve a restructuring plan that will allow the auto maker to sell its most valuable assets to a new company controlled by the U.S. and Canadian governments, the United Auto Workers union and its unsecured creditors. Read the Daily Bankruptcy Review story here.
Auto makers and analysts say the troubled auto industry could see a bit of a turnaround when U.S. sales are reported Wednesday, possibly hitting the 10 million mark, WSJ reports.
But according to the Detroit News, Detroit Public Schools is considering bankruptcy as well as laying off 17.7% of its workforce, though it still won’t eliminate the district’s $259.5 million debt.
City officials in Douglas, Ga., have been trying to find a buyer for the Pilgrim’s Pride plant in order to save almost 1,000 jobs and $300,000 in tax revenues, but the chicken processors isn’t eager to sell, according to WSJ.
Nortel Networks Corp. Monday won court approval to put the bulk of its network carrier business on the bankruptcy auction block in July. Read the DBR story here.
Bankruptcy Law Network - Real Lawyers, Real Solutions
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Can I File Blank Bankruptcy Forms To Start My Case?
Posted: June 30th, 2009, 6:23am PDT by Jay Fleischman, New York Bankruptcy Lawyer
When you file for bankruptcy you are required to file certain documents - your bankruptcy petition, bankruptcy schedules, and a host of other papers. These papers must all be completed accurately, honestly and completely. You do not get the option of filing blank forms “just for now.” If you do, the bankruptcy trustee or [...]
» Long Island, New York | NY | Bankruptcy Lawyer | Attorney At Law
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Student Loans and Bankruptcy
Posted: June 30th, 2009, 2:45am PDT by Craig
Written by Craig D. Robins, Esq.
Most debts can be eliminated and discharged in a Chapter 7 bankruptcy case. However, there are some exceptions and student loans are probably the most common exception.
About 20 years ago, Congress amended the Bankruptcy Code to make student loans non-dischargeable.
There is only one way around this rule, but it applies in very few cases. If the debtor can demonstrate that repaying the student loan results in an “undue hardship”, either for the debtor or the debtor’s family, then the bankruptcy court can discharge the loan.
In general, the bankruptcy court will use a three-prong approach to determine if there is undue hardship:
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- The debtor would not be able to maintain a minimal standard of living if forced to repay the loan.
- The hardship will continue for a significant portion of the loan repayment period.
- The debtor has made good-faith efforts to repay the loan before filing bankruptcy.
Related posts:
- Supreme Court to Review Several Bankruptcy Cases Next Term Written by Craig D. Robins These Supreme Court decisions...
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Bankruptcy Law Network - Real Lawyers, Real Solutions
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Exemption Amounts Increased in Oregon (a small step)
Posted: June 29th, 2009, 8:59pm PDT by Karen Oakes, Southern Oregon Bankruptcy Attorney
On Friday, June 26, 2009, Governor Ted Kulongski signed HB 2306, which provides increased protection for a debtor to protect his vehicle and his home from creditors. Formerly, a debtor could protect $2150 in value of a motor vehicle. The bill amends Oregon Revised Statute 18.345(d) motor vehicle exemption value up to $3000. Oregon has [...]
BankThink
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Can Citi hold it together?
Posted: June 29th, 2009, 2:56pm PDT by Emily.Flitter
For all Citigroup's perceived flaws in the Chuck Prince era, the company seemed to make steady and visible progress under the lawyer's watchful eye in terms of its internal controls and its relationship with the myriad regulators who oversee its far-flung operations. In the past week, however, there have been signs of slippage — with one instance bearing more than a passing resemblance to difficulties it faced before Prince's governmental-relations repair work.
The blog Housing Wire last week reported that Citigroup had put its correspondent lending division's activities on hold while it investigated breaches in "quality control." Translation: Citi was funding loans made by independent mortgage brokers who, as late as last week, were still not bothering to verify appraisal or income information they were getting from applicants.
Citi's recent censure in Japan is perhaps even more telling. Japanese regulators announced Friday that they would ban Citi from advertising its retail financial products for a month because the bank had not been properly monitoring or eliminating "suspicious activity," including money laundering. Japan's Financial Services Authority said that Citi's Japanese unit had not "accurately identified a series of problems that were recently found" and that "the effectiveness of the internal audit has not been ensured." Remember that this is the same body that shuttered Citi's private bank in Japan for a very similar set of violations. That episode that culminated a bow of apology delivered personally and publicly by Prince in 2004.
The U.S. regulator for money laundering, the Treasury Department's Financial Crimes Enforcement Network, has engaged in enforcement actions against several banks in recent years over failures to adequately handle suspicious activity reports or otherwise maintain a good internal auditing system to catch financial crimes. But it's been nearly two years since FinCEN has cited a U.S.-based bank. A spokesman for the agency would not say whether Japan's FSA's move would prompt any additional monitoring of Citi in the U.S.
Current CEO Vikram Pandit has tried to maintain Citi's image as a functioning global bank, and as an institution that is on track to regain its independence from the government and re-cast itself as a top competitor in markets around the world. So the timing of these missteps is especially problematic. Because the last thing Citi needs now is evidence that its operational house is not in order.