Macdonald | Fernandez LLP

MACDONALD | FERNANDEZ LLP


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San Francisco, CA 94104
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Tuesday, December 31, 2013

Happy New Year!

Happy New Year from Macdonald Fernandez LLP.

Monday, December 30, 2013

Quick Note on Judgment Liens in California


In California, a judgment lien against real property generally remains in effect until 10 years from the date of entry of the judgment, unless the judgment is earlier satisfied or the lien is released. Cal. Civ. Code § 697.310(b); FDIC v. Charlton, 17 Cal. App. 4th 1066, 1069 (1993).  The lien may be extended for an additional 10 years upon renewal of the judgment and the filing of a certified copy of the renewal application before expiration of the judgment lien. Cal. Civ. Code § 683.180; Beneficial Fin. Inc. v. Durkee, 206 Cal. App. 3d 912, 916–917 (1988).  The 10-year period for the extension runs from the date of filing of the application for renewal with the court clerk. Cal. Civ. Code § 683.180.

By Matthew J. Olson

Friday, December 27, 2013

Happy Holidays!

Merry Christmas from Macdonald Fernandez LLP, and have a Happy New Year!

Wednesday, December 18, 2013

Partnership That Never Existed Cannot Create Nondischargeable Debt

In Utnehmer v. Cruel (In re Utnehmer), 2013 Bankr. LEXIS 4482, NC-12-1362-PaDJu (9th Cir. BAP Oct. 10, 2013), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit ("BAP") ruled that Bankrupcty Code Section 523(a)(4) did not apply to render a debt nondischargeable in relation to a partnership that was never formed.  Specifically, an agreement to re characterize debt as profit-sharing equity was conditional upon events that did not occur.

William Utnehmer participated in a general partnership for real estate development.  In connection with the development of a luxury residence, Utnehmer provided the plaintiffs with a loan agreement, a promissory note and a private offering memorandum.  To summarize, the documents provided that the plaintiff would make a loan of $100,000 at 12% interest secured by a lien against the property.  Conditional upon the drafting and execution of a formal operating agreement, $50,000 of the loan would be re characterized as an equity contribution with a 10% annual preferred return and a 35% share of the profits, prorated based on the equity contribution.  The agreements were executed, and the loan was funded, but the operating agreement was never prepared.  The plaintiffs received interest payment in the three years that followed, but no principal.

After the plaintiffs retained counsel to enforce the obligation, Utnehmer and his spouse agreed to pay $50,000 in installments of $2,000 per month and that the remaining $50,000 would be recharacterized as equity upon the sale of the property and paid along with a 10% preferred return and their prorated share of 35% of the net proceeds.  Only $4,000 was paid, and when the property was sold for $3,725,000, Utnehmer apparently told the plaintiffs he could not pay them from the proceeds.  The plaintiffs brought and action, which resulted in a default judgment for $213,645.17.

Thereafter, Utnehmer and his spouse filed a chapter 7 bankruptcy case, and the plaintiffs brought an action to render the debt nondischargeable.  The complaint plead causes of action under Bankruptcy Code Sections 523(a)(2) (fraud) and 523(a)(6) (willful and malicious injury), which were unavailing, but prevailed under Section 523(a)(4), which was raised at trial and not challenged as untimely.

Bankruptcy Code Section 523(a)(4) provides that a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" is nondischargeable.  The phrase "while acting in a fiduciary capacity" has long been interpreted to require the existence of an express trust (arising by agreement) or technical trust (arising by statute or by law).  The Ninth Circuit previously applied a very low standard to "defalcation," holding that it includes any failure to account sufficiently, regardless of benign intent.  In re Lewis, 97 F.3d 1182, 1186-1187 (9th Cir. 1996).  To summarize, the claim that arises when a trustee takes property out of trust is not dischargeable in bankruptcy.

The bankruptcy court applied In re Lewis in finding that there was a defalcation.  However, there was a subsequent change in the law when the Supreme Court of the United States decided Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), in which the Court rule that "defalcation" includes "a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase.  We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior."

The bankruptcy court also concluded that the debtor and the plaintiff were partners based upon the loan agreement's terms providing for a re characterization if debt as equity.  California law provides that that all partners hold partnership assets in trust.  Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986).  

The BAP reviewed this determination de novo and found that the loan agreement was insufficient to establish a partnership as a matter of law.  Specifically, the text of the agreement plainly stated that the loan would be partially re characterized as equity only upon the execution it an operating agreement for a limited liability company to be formed in the future.  An agreement to be partners in the future or upon the fulfillment of a contingency does not establish a partnership until that time arrives.  Solomont v. Polk Dev. Co., 245 Cal.App.2d 488, 496 (1966).  The parties may have become partners of they actually shared profits or management, but they never did.  

Moreover, the court notes that there is no case applying the rule in Ragsdale to a limited liability company.  Likewise, California law provides that officers and directors of a corporation do not hold company assets in trust within the meaning if Bankruptcy Code Section 523(a)(4).  Cal-Micro, Inc. v. Cantrell, 329 F.3d 1119 (9th Cir. 2003).


Also seen on Legal By the Bay, the Bar Association of San Francisco's blog.


Friday, December 13, 2013

Order for Relief From the Automatic Stay in Husband's Bankruptcy Case Enforced in Wife's Subsequent Case

In Alakozai v. Citizens Equity First Credit Union (In re Alakozai), 2013 Bankr. LEXIS 4380, NC-12-1470-PaDJu (9th Cir. BAP Oct. 2, 2013), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit ("BAP") affirmed a bankruptcy court order granting relief from the automatic stay to proceed with an unlawful detainer action against the debtor notwithstanding the filing of the sixth bankruptcy case involving her residence.  The BAP also ruled that the lender’s prior foreclosure on the debtor’s real property during the fifth case did not violate the automatic stay because the lender’s order granting relief from the automatic stay in the fourth case (filed by her husband only) was effective in rem under Bankruptcy Code Sections 362(d)(4) and (20).
 
Debra Alakozai held a community property interest in certain real property encumbered by a promissory note in her husband's name secured by a deed of trust.  Her husband defaulted on the note and a trustee’s sale was scheduled. Thereafter, Alakozai and/or her husband variously filed a total of six bankruptcy cases.  The lender obtained relief from the automatic stay in the fourth case under Bankruptcy Code Section 362(d)(4) pursuant to an order providing that it was effective as to the property for 180 days.  The lender recorder the order after the case was dismissed.
 
Alakozai filed her fifth case within the 180-day period, and later that day the lender obtained title to the property at trustee’s sale.  The case was dismissed a month later, but Alakozai and her husband refused to vacate.  The lender commenced an unlawful detainer action.  Several months later, Alakozai and her husband filed the sixth case.  The lender obtained relief from the automatic stay to prosecute its unlawful detainer action, and Alakozai appealed.
 
Alakozai argued that the bankruptcy court in the fourth case, which was filed by her husband, did not make the necessary findings of fact to support in rem relief.  Therefore, she argued, the bankruptcy court's subsequent order in the sixth case was void.  On the contrary, the BAP found that the prior order was effective when the fifth case was filed and  Alakozai could not challenge the factual findings by collaterally attacking the unappealable and final order. 
 
Bankruptcy Code Section 362(d)(4) provides that “if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved . . . multiple bankruptcy filings affecting such real property” and the creditor records the order, it “shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order."  Bankruptcy Code Section 362(b)(20) provides that the automatic stay does not bar a lienholder from enforcing its lien if Section 362(d)(4) applies.
 
Alakozai argued that she was not a debtor in her husband’s bankruptcy case, in which the prior order was entered.  However, the court ruled that an order under Section 362(d)(4) binds any party asserting an interest in the affected property, including "every non-debtor, co-owner, and subsequent owner of the property.”  

Section 362(d)(4) was added to the Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consume Protection Act of 2005 ("BAPCPA") for the apparent purpose of curbing serial filings.  It will be interesting to see whether the BAP's broad language aids that goal or gives rise to unintended consequences, such as frustrating the reorganization efforts of an arms-length buyer.

Wednesday, December 11, 2013

In re Gasprom: Foreclosure After Abandonment, Before Closure of Chapter7 Case, Violated Automatic Stay

In In re Gasprom, 500 B.R. 598 (9thCir. BAP 2013), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit ("BAP") held that a lienholder violated the automatic stay in bankruptcy by foreclosing on assets abandoned by the trustee before the corporate debtor's chapter 7 case was closed.

Following conversion of the case from chapter 11, the trustee moved to abandon the estate's chief asset, which was a defunct gas station with permitting and hazardous waste issues.  The asset was fully encumbered by a lien.  The bankruptcy court granted the motion over the debtor's objection (citing In re D’Annies Restaurant, 15 B.R. 828 (Bankr. D.M.N. 1981)) and noted that the effect of the abandonment would be to terminate the automatic stay.  The lienholder foreclosed later that day, and the case was closed shortly thereafter.

The debtor filed a motion to reopen the case so that it could set aside the foreclosure and recover for the alleged violation of the automatic stay.  The court reopened the case but denied the motions in advance, ruling that upon entry of the abandonment order, the automatic stay no longer enjoined the sale, and that the court would annul the automatic stay sua sponte to the extent necessary.

The BAP reversed, holding that although the collateral left the estate upon abandonment, the automatic stay remained in effect with respect to property of the debtor under Bankruptcy Code Section 362(a)(5).  The BAP declined to follow authorities holding that the automatic stay only protects the property of an individual debtor (and not a corporate debtor) following abandonment.  Instead, the court followed authorities holding that abandonment returns property to the debtor nunc pro tunc as if no bankruptcy petition had been filed.

Tuesday, December 10, 2013

Update: Disposition of Nortel Cash to be Determined in Joint US-CanadianCourt Hearings, Not Arbitration

Following up on our post on November 4, 2013, the United States Court of Appeals for the Third Circuit ruled on Friday that the diaposition of Nortel Networks' $7.5 billion in cash will be decided in joint US-Canadian court hearings.  The court disagreed with an argument by Nortel's European estates that an agreement referring to undefined "dispute resolvers" compelled arbitration.

Thursday, December 5, 2013

Ninth Circuit BAP Rules California Law Bars Nondischargeability Action by Sold Out Junior on Purchase Money Residential Loan Under $150,000 Notwithstanding Fraud

In Heritage Pacific Financial, LLC v. Montano (In re Montano), 13 C.D.O.S. 12820, NC-12-1579-PaDJu (9th Cir. BAP November 27, 2013), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit ruled that California's statutory one-action rule and anti-deficiency judgment scheme barred an action under Bankruptcy Code Section 523(a)(2)(B) brought by the purchaser of a sold-out junior purchase money mortgage formerly secured by a residence for less than $150,000 regardless of any fraudulent conduct.  

While California Civil Code Section 580b generally prohibits the recovery of a deficiency judgment after foreclosure, Section 726(f) provides an exception such that certain lenders may bring an action "based on fraud" where the borrower's fraudulent conduct induced the original lender to make the loan.  However, Section 726(g) provides an exception to the exception, barring such an action if the loan is secured by a single-family, owner-occupied residence, actually occupied as represented to the lender in obtaining the loan, and the loan is for $150,000 or less (adjusted annually with the Consumer Price Index as published by the United States Department of Labor).

Although certain facts were disputed, the court found that the original lender made both the senior and junior loan to the borrower in connection with his purchase of the home, and the junior loan was for less than $150,000 (the amount demanded was $89,990).  The court dismissed arguments that the $150,000 limit should apply to the aggregate of all purchase money loans, holding that the statute is plain on its face.  

The court also analyzed and affirmed the bankruptcy court's award of attorney's fees and costs to the borrower under Bankruptcy Code Section 523(d), which generally provides for such an award where a creditor brings a nondischargeability action on a consumer debt without substantial justification.  Specifically, the claim buyer could not submit competent evidence that the original lender actually relied on the alleged misrepresentations as to income in the borrower's loan application as the original lender was defunct.

Also seen on Legal By the Bay, the Bar Association of San Francisco's new blog.

Wednesday, November 27, 2013

Under Washington Law, Marriage Establishes No Express or Technical Trust With Respect to the Exception from Discharge Provided in Bankruptcy Code Section 523(a)(4)

In In re Mele, 13 C.D.O.S. 12737, No. WW-13-1173-DTaKu (November 25, 2013), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit held that a property allocation judgment arising from marital dissolution proceedings in Washington is dischargeable in a chapter 13 case notwithstanding Bankruptcy Code Section 523(a)(4), which excepts from discharge debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny...."

In Mele, the separated husband spent the spouses' $274,000 retirement savings, including spending hundreds of dollars on comic books and related expenses, and stopped paying child support, all apparently in violation of a court order.  Accordingly, the family court awarded the wife a judgment for return of her interest in the funds.  The husband commenced a chapter 13 bankruptcy case, and the bankruptcy judge ruled in favor of the wife in her nondischargeability action.

The BAP reversed.  First, there was a subsequent change in the law when the Supreme Court of the United States decided Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), in which the Court rule that "defalcation" includes "a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase.  We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." The former standard was very low and was triggered by even the most minor failure to observe fiduciary duties.  The bankruptcy court did not apply the new, higher standard.

More fundamentally, the BAP determined that a marital relationship under Washington law does not constitute an express or technical trust, which is a requirement that courts have long ascribed to the words "while acting in a fiduciary capacity."  An express trust is one created by expressly by the parties by words or agreement.  A technical trust arises from statute or at law.  In re Lewis, 97 F.3d 1182 (9th Cir. 1996).

Crucial to the BAP's ruling is that Washington has a statute governing when and how a trust is created, which was not applicable to marriages in general.  Revised Code of Washington Section 11.98.008.  Although there is Washington case law describing the fiduciary duties of spouses as arising from a confidential relation of trust, the court found no authority actually holding that a marriage constitutes an express or technical trust.  It will be interesting to see how this ruling is used in the context of other states' marital property regimes.

Also seen on Legal By the Bay, the Bar Association of San Francisco's New Blog.

Friday, November 15, 2013

The Business Judgment Rule in the Central District of California


A pair of recent decisions by the United States District Court for the Central District of California challenge the strength of the business judgment rule.  To summarize, the cases hold that the business judgment rule does not protect corporate officers (as opposed to directors).

The business judgment rule is a presumption that a corporate director or officer acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the company.  Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).  The business judgment rule is a defense to allegations of breach of the duty of care but not the duty of loyalty, which also cannot be waived under Delaware Code Section 102(b)(7).  Stone v. Ritter, 911 A.2d 362 (Del. 2006). 

In FDIC v. Van Dellen, 2012 WL 4815159 (C.D. Cal. October 5, 2012), the court held that the business judgment rule does not apply to protect officers of a corporation.  The court found that California Corporations Code Section 309 did not apply, and it also declined to extend to officers the California common law rule that “insulat[es] from court intervention those management decisions which are made by directors in good faith in what the directors believe is the organization's best interest.” 

More recently, in FDIC v. Faigan, 2013 WL 3389490 (C.D. Cal. July 8, 2013), the court declined to apply the business judgment rule to officers.  In addition, the court ruled that the business judgment rule is not a defense against allegations of “receiving improper personal benefits” or “abdication of corporate responsibility.”  The decision assumes that California Corporations Code Section 309 codifies the business judgment rule under California law.  However, the official comments to Model Business Corporations Act Sections 8.30 and 8.31 caution courts against assuming that a state's implementing statute is a codification of the business judgment rule itself.  California's statute is practically identical to the model rule. 

Both decisions involve choice of law issues, and both courts appear to assume that the choice not to apply Delaware law is determinative of the outcome.  Although Delaware corporate officers "owe fiduciary duties of care and loyalty" to the corporation (Gantler v. Stephens, 965 A.2d 695, 708-709 & n.37 (Del. 2009)), no Delaware court has explicitly held that the business judgment rule applies to officers.

Tuesday, November 5, 2013

Recent Developments in Business Bankruptcy

Reno Fernandez of Macdonald Fernandez LLP is proud to be hosting this year's annual Recent Developments in Business Bankruptcy program, with Bankruptcy Judge Dennis Montali, Cecily Dumas and Ron Oliner, today at 4:00 to 6:00 pm at 301 Battery Street, San Francisco, California.

Monday, November 4, 2013

The Current Chapter 15 Landscape and International Insolvency

Four recent cases shape the current landscape of international insolvency practice under Chapter 15 of the Bankruptcy Code, namely:  In re Vitro, S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012); Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013); In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y.) (JMP); and In re Nortel Networks, Inc., No. 09-10138 (Bankr. D. Del.) (KG).

In re Vitro

In re Vitro began with a "concurso mercantil" in Mexico, similar to a chapter 11 reorganization.  Unlike the Bankruptcy Code, the concurso involves only a single class of creditors and provides for the termination of a guarantor's liabilities.  Following approval of a plan in the concurso, Vitro commenced a chapter 15 case in New York for the purposes of enforcing the plan against holders of bonds issues in the United States.  Thereafter, the chapter 15 case was transferred to Texas, where certain creditors had previously commenced involuntary chapter 11 proceedings.

The bondholders objected to recognition of the plan approved in the concurso, arguing that the result was too different from the likely outcome of an American reorganization.  The United States Court of Appeal for the Fifth Circuit agreed, applying a multi-step statutory approach and ultimately concluding that the result of the foregoing proceeding must be compared to the result that could be obtained under the Bankruptcy Code.

First, a the court must decide whether the relief requested by the foreign representative comes within the mandatory items enumerated in Bankruptcy Code Section 1521(a)(1)-(7).  If not, the court must determine whether it can grant “appropriate relief” under the terms of Bankruptcy Code Section 1521(a), which the Fifth Circuit held is limited to relief that is permissible under Bankruptcy Code Section 304 or would otherwise be available under United States bankruptcy or non-bankruptcy law.  

If not, the court next must consider whether “additional assistance” is appropriate under Bankruptcy Code Section 1507.  In making this determination, the court must consider whether the grant of additional assistance will “reasonably assure”:

     1.  The just treatment of all holders of claims against or interests in the debtor’s property;

     2.  Protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

     3.  Prevention of preferential or fraudulent dispositions of property of the debtor;

     4.  Distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by the Bankruptcy Code; and

     5.  If appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.

Finally, relief otherwise available under the foregoing analysis must also satisfy Bankruptcy Code Section 1506.  

The court found that the treatment of creditors in the Mexican proceedings was too different from the results that would have been obtained under the Bankruptcy Code.

Vitro is subject to significant criticism.  Some critics suggest that it defeats the interests of international comity, which chapter 15 was designed to support.  More particularly, the principals applied in enforcing an ordinary foreign judgment focus upon whether the requested relief is manifestly contrary to the public policy of the United States; this standard is embodied in Bankruptcy Code Section 1506.  Critics suggest that the court should start with Section 1506, and it would be hard to say that the United States has a public policy against third-party releases because the circuit courts themselves are split on the issue.  It remains to be seen whether Mexican courts will retaliate by refusing to recognize American chapter 11 plans.

Morning Mist Holdings

In Morning Mist Holdings Ltd., the debtor was subject to liquidation proceedings under the British Virgin Islands Insolvency Act and a subsequent chapter 15 bankruptcy case in the Southern District of New York.  The United States Court of Appeals for the Second Circuit held that the time for determining the debtor's center of main interest ("COMI") was the date on which the chapter 15 petition was filed.

Determination of the COMI is important.  If the COMI is within the country where the foreign proceeding is pending, then the proceeding will be recognized as a "foreign main proceeding" under Bankruptcy Code Section 1517, and certain relief will become effective, including the automatic stay.

The bankruptcy court's recognition of the foreign proceeding triggered the automatic stay against all actions in the United States, including a prepetition shareholder derivative action.  The plaintiffs argued that the COMI should be determined by reference to the debtor's 18-year history of operations.  The plaintiffs also argued that recognition the foreign proceeding would be manifestly contrary to United States public policy because the court records in the foreign proceeding were sealed.  The court concluded that the right to access court documents is not absolute and is not so fundamental that recognition of the foreign proceeding would trigger the public policy exception of Bankruptcy Code Section 1506.

The Second Circuit concluded that the time for determining the COMI is the petition date, although consideration of prior activity may be appropriate to ensure there has been no manipulation.  The clear holding in Morning Mist Holdings is likely to aid attorneys and courts in determining whether to recognize foreign insolvency proceedings.

Lehman Brothers

The plan confirmed in the Lehman Brothers cases resulted from a cooperative, streamlined procedure that could serve as a model for other complex international insolvency proceedings.  

In June, 2009, Judge Peck of the United States Bankruptcy Court for the Southern District of New York adopted a protocol for international cooperation that involved 16 jurisdictions.  Most such protocols are bilateral arrangements between courts of two countries.

The protocol encouraged notice, communication and data sharing; permitted insolvency representatives in one country to appear and be heard at meetings and hearings in other countries, to communicate among courts and committees and to maximize the realization on the assets in each country; and allowed the courts and parties to deal with complex issues arising from extensive intercompany claims.

The protocol, among other things, is credited with fostering the consensual chapter 11 plan ultimately confirmed in the Lehman Brothers cases, which at the time constitutes the larges and most complex bankruptcy in history.

Nortel Networks

By contrast, Nortel Networks, Inc. provides and example in which lack of cooperation has delayed the distribution of funds in an otherwise successful case.

In Nortel Networks, the debtor's assets were sold for more than $7 billion, which process itself involved successfully overcoming significant challenges.  The funds were deposited to escrow, where they remain today.

Thereafter, the case became complicated by the apparent existence of three COMI's.  Currently, the United States and Canadian courts involved intend to conduct a joint trial in early 2014 to determine how to divide the sale proceeds. Both rejected a demand from the United Kingdom interests to arbitrate the dispute.  This decision is on appeal by the U.K. interests.


Sunday, October 13, 2013

Reno Fernandez Appointed to California State Bar Insolvency Law Committee

Macdonald Fernandez LLP is proud to announce that on Friday, October 11, 2013, Reno Fernandez was appointed to the Insolvency Law Committee of the State Bar of California's Business Law Section.

Monday, October 7, 2013

Don’t take it "PERS-onally:

Do you get the pun?  Come hear how CalPERS and other PERSons (such as holders of municipal bonds) play a role in municipal bankruptcies.  Join us for a white-linen lunch and this wonderful program:

Don't Take it PERS-onally!

Chapter 9 Municipal Bankruptcy as a Game Changer

Speakers

Honorable M. Elaine Hammond
U.S. Bankruptcy Judge, Northern District of California

Gary M. Kaplan
Farella, Braun & Martel LLP

Michael Sweet
Fox Rothschild LLP
Moderator 

Gregg Ficks
Coblentz, Patch, Duffy & Bass LLP

Date, Time & Location

Tuesday, October 8, 2013
Noon to 1:30 pm

Le Meridien Hotel
333 Battery Street
San Francisco, California

Topics

• Overview of Chapter 9 and comparison to Chapter 11
• Meeting the eligibility requirements for filing Chapter 9
• Confirming a Chapter 9 Plan, including new wrinkles in pension and bond debt restructuring
• Recent developments in pending and potential Chapter 9 cases

Chair: Reno Fernandez, Macdonald Fernandez LLP 

Walk-ins are welcome, but you can RSVP here.

Bank of America Fined $10,000 Per Month for Violations of Discharge Injunction

On Tuesday, United States Bankruptcy Judge Rober Drain ordered Bank of America to pay $10,000 plus attorney's fees for every month that the bank attempts to collect from Edwin and Michelle Ramos, who previously received a discharge in their chapter 7 bankruptcy case.  Although liens and mortgages were not discharged in their case, their personal liabilities were discharged, including their personal liability to to the bank.  The court stated that the ruling was intended to "send a message."

Wednesday, October 2, 2013

Bankruptcy Courts Remain Open; US Trustee Program Cuts Back

The United States Bankruptcy Court for the Northern District of California will remain open notwithstanding the government shutdown, Chief Judge Alan Jarolovsky announced yesterday.  He reminded the bar that properly following procedures is of critical importance in order to avoid unnecessary burdens during the shutdown.

The Office of the United States Trustee will also remain open, but only one-third of its staff is deemed essential, the Wall Street Journal reported yesterday.

Thursday, September 26, 2013

Bakersfield Bankruptcy Court Closes Temporarily

The U.S. Marshal Service has informed the bankruptcy court that temporary staffing vacancies preclude adequate security for the Bakersfield Bankruptcy Court, and the situation is likely to persist for several months.  Accordingly, the court is closed, all Bakersfield bankruptcy matters will be heard in the Bakersfield Federal Courthouse at 510 19th Street in Bakersfield, California or in the Fresno U.S. Bankruptcy Court.

Judge Lee’s current Bakersfield Calendars are here:  October 2 and October 3.

Judge Clement’s current Bakersfield Calendar is here: September 26.

Thursday, September 12, 2013

Detroit Retirees and Unions Say Municipal Bankruptcy Unconstitutional

A line in the Michigan state constitution provides that public worker pensions cannot be undone.  Detroit unions have joined a committee of retirees seeking to end Detroit's bankruptcy case on these and other grounds.  They intend to depose Michigan's governor Rick Snyder as to his role in authorizing the bankruptcy.  It will be interesting to see how tensions between federal preemption and state sovereignty are resolved in the context of a Chapter 9 bankruptcy.

Tuesday, September 10, 2013

Martindale-Hubbell Rates Iain A. Macdonald AV Preeminent

We are proud to announce that Iain A. Macdonald has earned Martindale-Hubbell's highest rating:   AV Preeminent.  Congratulations!

Senator Requests Probe of U.S. Trustee Attorney's Fees Initiative

Senator Chuck Grassley (R-Iowa) has requested a probe of the U.S. Trustee's initiative to overhaul how counsel is compensated in large chapter 11 cases. On November 1, 2013, new rules for attorney pay in large chapter 11 cases go into effect.  The U.S. Trustee hopes the guidelines will dispel the perception that lawyers take advantage of large corporate bankruptcy cases to charge expensive fees of $1,000 per hour or more.  In a letter yesterday, Senator Grassley asked the U.S. Government Accountability Office to review whether the new fee guidelines will “prevent excessive fees in the future and, if not, whether legislation is needed to address this problem.”

The new guidelines will be discussed in a Bar Association of San Francisco program set for today.  Click here to register.

Monday, September 9, 2013

Diocese of Stockton Considers Bankruptcy

Quick Update:  The Diocese of Stockton, California, of the Catholic Church, is considering filing for bankruptcy protection amid costly settlements with sex-abuse victims.  It would become the tenth Diocese in the U.S. to do so.  Bishop Stephen Blaire announced that “options other than filing for bankruptcy protection have not emerged.”

Friday, September 6, 2013

Morgan Lewis to Pay $1.15 Million to Howrey Bankruptcy Estate

Morgan, Lewis & Bockius has agreed to pay $1.15 million to the bankruptcy estate of Howrey LLP to settle $12 million in potential claims for unfinished business under Jewel v. Boxer.  The agreement is awaiting approval by the bankruptcy court.

AnchorBank's Holding Company Tries New Bankruptcy Strategy

A bank holding company typically files bankruptcy after the FDIC takes over its bank subsidiary, when the only task left is to marshal assets and liquidate. Anchor BanCorp, holder of AnchorBank, is trying something new.

Specifically, Anchor BanCorp filed a chapter 11 bankruptcy petition on August 12, 2013, before a takeover of AnchorBank, which may be avoided in light of the bankruptcy.  Anchor BanCorp proposes a genuine restructuring in which it would pay off more than $180 million in debt owed to other banks for just $49 million; it could convert the U.S. Treasury’s preferred stock into an equity stake worth about $6 million (the bank received $100 million in TARP funds); and it would recapitalize by canceling its existing shares and sell the remaining new equity to investors.  The bankruptcy court approved the plan last week, but regulators still need to sign off.

If successful, Anchor BanCorp could provide a model for other struggling regional banks to get ahead of the FDIC and take control of their own restructuring.


Thursday, September 5, 2013

IRS Penalties for Late Filed Corporate Tax Returns are NotAdministrative Expenses

The Ninth Circuit Bankruptcy Appellate Panel has ruled that penalties imposed by the Internal Revenue Service for untimely filing corporate tax returns were not administrative expenses.  In Kipperman v. Internal Revenue Service (In re 800ideas.com)13 C.D.O.S. 9790, BAP No. SC-12-1496-JuBaPa (9th Cir. BAP July 22, 2013), chapter 7 trustee Richard M. Kipperman appealed from the bankruptcy county's order allowing the penalties as an administrative expense necessary for preservation of the debtor's estate pursuant to Bankruptcy Code Section 503(b)(1)(A).  The BAP disagreed and remanded the case to bankruptcy court for determination of whether the penalties qualify as administrative expenses for other reasons.  

Specifically, the BAP noted that the case was a chapter 7 case.  Accordingly, the penalties were not incurred in the operation of a business and, as a result, the penalties were incurred neither to benefit the estate nor preserve it.  Moreover, the failure to timely file tax returns did not constitute a post-petition tort under Reading Co. v. Brown, 391 U.S. 471 (1968).

It is important to timely file estate tax returns or comply with procedure to excuse the filing requirement (the opinion has a good review of certain new procedures).  Nevertheless, the upshot of this case is that penalties for late filing are not entitled to administrative priority on the grounds advanced by the IRS and are apparently limited to general unsecured claims.


Tuesday, September 3, 2013

Bankruptcy Court May Handle Compensation for Victims in Lac-Magantic Train Crash

Montreal, Maine and Atlantic Railway, owner of the runaway freight train that crashed in Lac-Megantic, Quebec, killing 47 people, filed for Chapter 11 bankruptcy protection in Bangor, Maine, and Canada on August 7, 2013.  Last month, the railway asked Bankruptcy Judge Louis Kornrich to appoint a committee to represent wrongful death and personal injury claimants, seeking to avoid the burdens of handling dozens of individual lawsuits. The estates of 33 of the victims joined in supporting the motion.  The railway is likely to be sold in the course of bankruptcy proceedings, reported the Maine Sun Journal.

Friday, August 30, 2013

Getting Employed & Getting Paid in Bankruptcy Cases

Join us for a white-linen lunch and this wonderful program:

Getting Employed and Getting Paid in Bankruptcy Cases

Tips for Effectively Negotiating the Employment and Fee Application Processes

Speaker

Lynette Kelly
U.S. Trustee’s Office

Christopher D. Sullivan
Greenfield, Sullivan, Draa & Harrington LLP

Michael G. Kasolas, CPA
Chapter 7 Panel Trustee, Oakland

Bill Brinkman
Jigsaw Advisors, LLC

Moderator 

Scott H. McNutt
McNutt Law Group LLP

Time & Location

Noon to 1:30 pm

Le Meridien Hotel
333 Battery Street
San Francisco, CA

Topics

• How to get employed and get your fees approved in an efficient, stress-free way
• How to guide other professionals in the case through the process
• A discussion of the Northern District’s treatment of employment and fee applications
• New U.S. Trustee guidelines regarding fee applications in large cases

Section Chair: Reno Fernandez, Macdonald Fernandez LLP 
Barristers Section Chair: Benjamin Uy, Jr., Pillsbury Winthrop Shaw Pittman LLP


RSVP HERE

Thursday, August 22, 2013

Contractor's Withdrawal Liability for Unpaid Pension Contributions Dischargeable in Bankruptcy

In Carpenters Pension Trust Fund for Northern California v. Moxley13 C.D.O.S. 9503, No. 11-16133 (9th Cir. August 20, 2013), the United States Court of Appeals for the Ninth Circuit ruled that a construction contractor's withdrawal liability for unpaid pension fund contributions is dischargeable in bankruptcy.

Contractors who stop working under collective bargaining agreements but stay in business must continue to fund the amount necessary to ensure payment to vested pension beneficiaries under ERISA.  29 U.S.C. §§ 1381, 1391.  In this case, Michael Moxley's obligations under a California carpenters multiemployer collective bargaining agreement lapsed but he continued in business without making pension contributions.  He filed bankruptcy owing the pension fund more than $170,000, and the fund brought an adversary proceeding to except it's claim from Moxley's discharge under Bankruptcy Code Section 523(a)(4).

Section 523(a)(4) excepts from discharge "any debt . . . for fraud or defalcation while acting in a fiduciary capacity . . ."  Although the pension fund is arguably a trust, the court determined that Moxley did not act in a fiduciary capacity with respect to the fund because, among other things:  (1) he did not administer the fund; and (2) the unpaid funds did not become an asset of the pension fund.

Section 523(a)(4) issues frequently arise in contractor cases, and this opinion should provide a valuable tool in determining how pension obligations are treated.

Tuesday, July 30, 2013

Assets Excluded From Personal Guarantee Did Not Extend to Proceeds

In Series AGI West Linn of Appian Group Investors De LLC v. Eves, 13 C.D.O.S. 6177 (1 Dist. Cal. App. 2013), the court upheld a ruling that a personal guarantee that excludes a particular asset from the reach of the creditor does not also exclude the sale proceeds of that asset without specific terms to that effect.  Specifically, the personal guarantee of a $3.1 million loan provides that "the personal guarantee may only be collected from assets not expressly excluded" as provided on an attached schedule, including the guarantor's residence.  The agreement and the attachment did not mention the proceeds of any sale of the residence.  Strictly interpreting the contract, the court held that it could not read in an implied term where the contract provided that only assets specifically identified would be excluded.  In light of this opinion, it will be important for borrowers and lenders to consider specific language extending excluded assets to sale proceeds, rents and profits, commingled funds, exchanged assets (as in a 1031 exchange) and the proceeds of loans secured by such assets.


Monday, July 29, 2013

Reno Fernandez Named Super Lawyers Rising Star

We are pleased to announce that Reno Fernandez has been named a Rising Star by Super Lawyers for the second year running. 

Thursday, July 25, 2013

Assignee of Sold Out Junior Could Not Sue Borrower Upon Fraud Claim Not Specifically Assigned

In Heritage Pacific Financial, LLC v. Monroy, 2013 Westlaw 1779278 (Cal.App.), the buyer of a junior note secured by a mortgage that was extinguished by the foreclosure of a senior lien sued the borrower for fraud, alleging that her loan application falsely stated that her monthly income was $9,200.  The borrower demurred and brought a counterclaim alleging that the plaintiff's demand letter violated the Federal Fair Debt Collection Practices Act by attempting to collect an unenforceable  debt.  The trial court granted the borrower's demurrer, granted her summary judgment on her counterclaim and awarded her $90,000 in attorney's fees.  The appellate court affirmed, holding that the fraud claim was not transferred to the debt buyer; it was not "incidental" to the overall sale, and there was no specific transfer of the fraud claim.  This case is emblematic of recent hostility toward bulk buyers of consumer debt.

Wednesday, July 10, 2013

New Procedures for Sole Proprietorships in Chapter 7 Cases in Fresno and Bakersfield

On July 2, 2013, Chapter 7 Trustees James Salven, Trudi Manfredo and Peter Fear announced new procedures they will follow in administering sole proprietorships in chapter 7 bankruptcy cases filed in Fresno and Bakersfield, California.  Specifically, the Trustees will promptly move for an order authorizing them to shut down the business until the case is closed.  The debtor may avoid shutting down by demonstrating that all property used in the business is exempt, offering to purchase the non-exempt equity in the property (and paying a deposit), or filing a motion to compel abandonment.  It is important to fully analyze a debt it's assets and understand these procedures before filing a chapter 7 case in Fresno or Bakersfield.

Tuesday, July 9, 2013

Improper Punctuation Prevents Perfection

In In re C. W. Mining Co., 2013 WL 888677 (D. Utah 2013), the district court of Utah held that a UCC-1 Financing Statement that omitted periods after initials in the debtor's name was unperfected and could be avoided under Bankruptcy Code Section 544.  Specifically, the recorded document identified the debtor as "CW Mining Company," as opposed to its registered name, "C. W. Mining Company," and the error prevented the company from appearing in a title search using Utah's standard search logic.  The fact that a reasonably diligent researcher might have found the lien was not relevant under UCC Article 9.  The error may cost the creditor almost $3 million.  The lesson:  cross your t's, dot your i's, and understand your state's search logic for recorded liens against personal property.

Thursday, June 27, 2013

Fifth Circuit Rules "Till" Not Mandatory, Reviews for Clear Error

In Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, LLC, No. 11-11109 (5th Cir. Mar. 1, 2013), the United States  Court of Appeals for the Fifth Circuit reviewed a bankruptcy court's determination of the "cram down" rate, which is the rate of interest paid after confirmation of a chapter 11 plan on account of a non-consenting secured claim, for clear error.  Wells Fargo Bank had argued that the appellate panel should conduct de novo review.  Although the parties agreed that the "prime-plus" formula established for all chapter 13 cases in Till v. SCS Credit Corp., 541 U.S. 465 (2004) should apply (in which the court starts with the prime rate and adjusts for risk factors), the Fifth Circuit declined to adopt a uniform standard for chapter 11 cases.  The Ninth Circuit has not ruled on the appropriate standard and whether it should be applied uniformly.


Friday, June 21, 2013

Madoff Trustee Barred From Suing Big Banks

The US Court of Appeals for the Second Circuit has upheld a lower court ruling barring Irving Picard, the trustee supervising the dissolution of Bernard Madoff's Ponzi scheme in bankruptcy, from recovering almost $30 million from JP Morgan Chase and other banks he alleges aided Madoff's fraud.  The court sustained the banks' in pari delicto defense (Latin for "in equal fault"), holding that Picard stands in Madoff's shoes and two wrongdoers cannot sue each other for damages related to their conduct.  The court also commented that the victims may sue the banks, but there may be financial and procedural hurdles.

Monday, June 17, 2013

Orchard Supply Hardware Files Chapter 11 Bankruptcy

Orchard Supply Hardware Stores Corp. has commenced a chapter 11 bankruptcy case in Delaware (Case No. 13-11565).  The company spun off from Sears Holdings Corp. in 2011, and blames burdensome payments owed to Sears as the reason for reorganizing.  Lowe's is set to serve as stalking horse bidder to buy 60 of OSH's 91 California stores with a bid of $205 million.

Thursday, June 13, 2013

Judgment Awarding Value of Withdrawing Member's Interest in an LLC Subordinated

In O'Donnell v. Tristar Esperanza Properties, LLC, BAP No. CC-12-1340-KIPaDu (9th Cir. BAP Mar. 8, 2013), the Ninth Circuit Bankruptcy Appellate Panel held that a judgment awarding the value of a withdrawing member's interest in a limited liability company is vulnerable to mandatory subordination under Bankruptcy Code Section 510(b) as damages arising from the purchase or sale of a security.

Jane O'Donnell withdrew her 14% membership interest in Tristar Esperanza Properties, LLC.  Pursuant to the operating  agreement, O'Donnell hired an appraiser, who estimated the value of her interest to be $399,918.  Tristar objected; O'Donnell brought an arbitration and obtained an award for $399,918 less $60,000 previously received.  The award was confirmed and a judgment was entered.

Tristar filed a chapter 11 bankruptcy case  and an adversary proceeding to subordinate O'Donnell's claim.  The debtor prevailed, and the BAP affirmed.

Although a membership interets in an LLC is not among the enumerated examples of a "security" under Bankruptcy Code Section 101(49), the BAP reasoned that it is analogous to "the interest of a limited partner in a limited liability partnership."  The BAP also analyzed the legislative history of Section 510(b) and prior cases, and held that O'Donnell's withdrawal was "nothing other than her cashing out her equity (at a value that the Debtor insists is highly inflated)."

The scope of the BAP's broad view of what constitutes a claim arising from the purchase or sale of a debtor's securities. Any claim with a nexus or causal relationship with a transaction involving securities may be subject to mandatory subordination.


Stockton to Pay $5.1 Million to Settle Health Benefit Claims

In the chapter 9 bankruptcy of Stockton, California, the city will pay $5.1 million in a settlement with retired employees on account of lost health benefits.  The settlement is part of the city's reprganization plan.  The settlement tepresents 2% of the value of the lost benefits, but it preserves their pensions.  The retirees will have the opportunity to vote on the plan.  

Thursday, June 6, 2013

MF Global Creditors Could Receive 94% Recovery

MF Global Inc.’s former customers may receive more than 94 cents on the dollar, an outstanding return in a bankruptcy liquidation.  Most have already recovered 89 percent of their claims. The additional recoveries depend in part upon finalizing settlements with MF Global’s U.K. office and JPMorgan Chase.  Litigation against officers and directors, including Jon Corzine, will also affect the size and timing of the distribution. http://tinyurl.com/llcmows

Wednesday, May 29, 2013

Appointment to National Conference of Bankruptcy Judges Next Generation Program

We are pleased to announce that Reno Fernandez has been selected for the National Conference of Bankruptcy Judges Next Generation Program for 2013.  Attorneys from our firm will be attending the conference October 30 through November 2, 2013, in Atlanta, Georgia.

Tuesday, May 21, 2013

Bankruptcy Crimes

Join Reno Fernandez, Chair of the Bar Association of San Francisco's Commercial Law & Bankruptcy Section, for this white-linen lunch program:

BANKRUPTCY CRIMES
Tuesday, June 11, 2013
Noon to 1:30 pm

Speakers 

Hon. Stephen L. Johnson, Bankruptcy Court for the Northern District of California, San Jose Division

Joseph Fazioli, Assistant U.S. Attorney, U.S. Department of Justice 

Jeffrey L. Bornstein, Partner, K&L Gates

Emily S. Keller, Trial Attorney, U.S. Trustee’s Office

Moderator

Ivo Keller, Associate, Buchalter Nemer

Topics

• A discussion of the intersection between the bankruptcy code and criminal law

• How attorneys should respond when they see evidence of potential criminal conduct

• Considerations affecting public prosecutors’ handling of allegations of fraud and other crimes in bankruptcy cases


Location


Le Meridien Hotel
333 Battery Street
San Francisco, CA 

Please RSVP to: http://tinyurl.com/oc3gbuw

Thank you for supporting the Section.  See you there!

Thursday, May 16, 2013

Macdonald | Fernandez LLP Congratulates the California Bankruptcy Forum on 25 Years of Excellence!

We are happy to be attending the California Bankruptcy Forum's Insolvency Conference, which kicks off today.  Congratulations to the CBF on its 25th anniversary!

Monday, May 13, 2013

Kodak Chapter 11 Reorganization Plan Faces Challenges, Requests forAppointment of Retiree and Shareholder Committees

A shareholder in Eastman Kodak Co. has filed a significant objection to the company's chapter 11 reorganization plan, which provides for the effective elimination of the company's stock.  Shareholder Matthew Glassman argues that equity holders need representation in the case and that the reorganization plan “is a blatant attempt to rob both the shareholders and unsecured debt and bond holders of money and shares that are rightfully theirs.” Kodak is also facing challenges by retirees, and the bankruptcy court has set a hearing for June 20, 2013, to consider creating an official committee of retirees in connection with unfunded retirement programs Kodak eliminated when it filed for bankruptcy.  Read more here.

Friday, May 10, 2013

Jefferson County Bondholders May Face Losses

Jefferson County, Alabama, announced yesterday that it will file a chapter 9 reprganization plan by late June, 2013, to exit bankruptcy. Jefferson County may become the first large local government since the 1930's to impose losses upon its bondholders. Read more here.

Thursday, May 9, 2013

CFPB Recommends More Flexible Approach to Private Student Loan Debt

Yesterday, the Consumer Financial Protection Bureau (CFPB) proposed to create more flexible repayment plans for private student loans.  These loans are $150 billion of the current $1 trillion in outstanding student loan debt.  The CFPB proposes that borrowers who pay on time should be allowed to refinance at lower interest rates, whereas borrowers who default should be provided with income-based repayment plans.  The CFPB urges lenders to implement those recommendations now.  The CFPB also proposed that a rehabilitation program available for federal student loan debt be extended to private loans.  Read more here.

Monday, April 15, 2013

Changing the Light at the End of the Tunnel: Distressed Financing Roundtable

Check out this article I wrote for the Bulletin, the newspaper for the Bar Association of San Francisco, all about a roundtable of distressed lending professionals I hosted as chair of the Commercial Law and Bankruptcy Section.  You can see the video here. - Reno Fernandez