Lanigan & Lanigan, P.L.
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Bankruptcy
The San Bernardino City Council recently filed for Chapter 9 bankruptcy after learning it only had $150,000 left in its bank account, according to city officials. Although there are continuing reports of the economy creeping back to life some cities are still struggling to pay its debts. Many in San Bernardino are worried that the town may have to shut down if it can’t find the money to pay its employees. However, Chapter 9 bankruptcy protection is a special form of federal law for insolvent municipalities that will allow the city to renegotiate labor contracts and avert lawsuits by its creditors. Hopefully, these protections will enable the city to restructure its budget and forestall creditors enough to get back to financial stability. Yet, San Bernardino is looking at a $46 million deficit despite significant cuts in benefits and employees over the last few years. After years of a recession and growing labor costs the city has finally hit a wall, according to city officials. This only adds to the concerns of several other California cities that are also cutting jobs and facing the same problems. Like Florida, California, was one of the hardest hit states in the foreclosure crisis. As a result, several cities across California have gone bankrupt. Because of the mass foreclosure, the cities collect less in taxes which force them to make cuts to pension and health plans. Add this to increasing labor costs and you have a recipe for insolvency. Sometimes when facing a financial crisis the best thing to do is reorganize. Although Chapter 9 is reserved strictly for municipalities, Chapter 13 allows individuals...
Bankruptcy
Although closely related debtors other than spouses cannot file a joint petition, the court can order joint administration of their cases. Filing bankruptcy jointly is different than the joint administration of cases: only spouses can file jointly. But joint administration keeps estates separate so that each filing party has their own assets and liabilities. However, the estates are under the administration of the same trustee which cuts down the administrative costs and allows more convenient disposition of the cases. Joint administration is therefore an administrative device to save costs and allow for more efficient handling of separate estates. On the other hand, consolidation is another way to save costs. Sometimes, the court will consolidate the cases for procedural reasons such as where two sets of creditors have both filed involuntary petitions against the same debtor. Yet, the court also has the power to order the substantive consolidation of a case against separate debtors. Substantive consolidation is not provided for in the bankruptcy code but is a judicially created device based on the courts equitable discretion. For instance, where spouses or other closely related debtors, such as an individual and his or her corporation/subsidiaries are in bankruptcy, the court can combine their estates so that assets are pooled and creditors of each become creditors in the consolidate estate. However, substantive consolidation is different from joint administration because it combines the two separate estates into a single bankruptcy estate. As a result this may prejudice creditors of the debtor with the higher asset-to-debt ratio. Thus, substantive consolidation is not routinely permitted unless the party seeking consolidation can prove the overall equities...
Bankruptcy
While involuntary bankruptcy cases make up a small percentage of bankruptcy filings each year, it is important to understand the restrictions and limitations if you are forced into bankruptcy. Involuntary relief is only available in a narrow range of circumstances. Rare, But Available to Some To obtain an involuntary order for bankruptcy relief, petitioners must satisfy two different sets of requirements. First, the qualifications under 303(a), (b), and (c) must be met. Second, at the hearing of a controverted involuntary case, the petitioners must establish grounds for relief under 303(h). If the involuntary petition is not successful, the petitioners could be liable to the debtor for attorney’s fees, costs, and/or damages. Section 303(a), (b), and (c) address the nature of the debtor and creditor as well as the actual number of creditors. First, the debtor cannot be involuntarily placed into bankruptcy under chapter 12 or 13 and can only be placed in a Chapter 7 or 11. Second, the aggregate amount of claims must be within the code’s limits and excludes claims that are contingent as to liability (look to previous blog regarding “non-contingent debt”), the subject of a dispute as to the liability or amount, or fully secured by a lien. This means that if there is a bona fide dispute as to the amount owed or if a creditor is fully secured, an involuntary case may not be allowed. Third, if the debtor has 12 or more creditors, at least three must join in the petition. If the debtor has 11 or fewer creditors, only one petitioner is needed. Must Show Two Alternative Grounds Lastly, 303(h) permits...
Bankruptcy
Although the trustee is permitted to avoid transfers that prefer certain creditors, there are some fairly common exceptions. However, before consulting the exceptions in section 547(c), the elements of 547(b) must first be fulfilled. If the elements of a preferential transfer are met then the burden shifts to the transferee to show one of the exceptions apply. Avoiding Transactions That Circumvent Priority System The whole idea behind preferential transfers is to avoid transactions that circumvent the bankruptcy’s priority system. Thus, the exceptions are provided to prevent the trustee from avoiding ordinary business transactions and to distinguish them from last minute preferences. Although the code describes a number of exceptions, there are some that are much more common than others. PMSI 90 Days Before Bankruptcy The first major exception is the purchase money security interest. If a debtor grants a creditor a PMSI in the 90 days before the bankruptcy filing then the creditor has 30 days to perfect the security interest to put other creditors on notice. While normally the granting of a security interest would be considered an avoidable preferential transfer this exception will allow the transaction if the creditor files within the time period. The second major exception is the so called “new value” exception. If a debtor makes a payment to a creditor based on antecedent debt and this induces the creditor to provide another loan then the transfer fits the exception. The additional funds the creditor grants the debtor will offset the total amount of the preferential transfer. This is based on the theory that the only reason the creditor is giving new value...
Bankruptcy
One of the most important features of a secured transaction is the right of the secured party to enforce its security interest after the debtor’s default. The security interest is put in place to back up the obligation owed by the debtor to the secured party and is what gives the transaction its enforceability. Thus, the debtor will be working toward fulfillment of its obligation not just because of the fear of a breach of contract, but may also lose possession of some valuable piece of property. Best Case: Security Interest is Never Enforced Because it’s a headache for the creditor, most of the time the secured party wants the debtor to succeed and does not want to have to enforce the security interest by taking possession. In the best of cases the security interest is never actually enforced and the subject of repossession never enters either party’s mind. Accordingly, the event of default is a sign that something went seriously wrong and the secured party is left with no other alternative but to bring in the “muscle” of the contract. While there is no exact definition of “default,” the UCC leaves to agreement of the parties the circumstances giving rise to the event of default. It is the written security agreement that spells out the terms and conditions of a default. Thus, you should expect to find in some paragraph or section in the security agreement that lays out precisely what events will constitute defaults allowing the secured party to choose to exercise its rights and remedies. For example, one event that is expected to be on...
Bankruptcy
Article 9 of the Uniform Commercial Code governs any transaction, regardless of its form, which intends to and creates a security interest in personal property. On the other hand, Article 2A deals with any transaction, regardless of its form, that creates a lease of goods. This distinction can be very important in bankruptcy because sometimes a transaction may appear as a lease, but in reality it is a disguised sale with a security interest. If it really is a sale, this can be bad news for a creditor because he may not be fully secured and will only receive pennies on the dollar from the debtor in bankruptcy. In theory at least it should not be difficult to tell the difference between these prototypical commercial transactions but many times it comes down to the facts of the case. The UCC defines a lease as a transfer of rights to possession and use of goods for a term in return for consideration, but a sale, or creation of a security interest is not a lease. To determine if transaction is true lease or disguised sale, courts endorse the “economic realities test”. This test considers the likelihood at the time transaction entered into that the lessor will receive the goods back at a time when goods still have meaningful economic life. Accordingly, the UCC has codified the economic realities test by providing a bright line test to distinguish the two transactions. Section 1-203 of the UCC states that a security interest is created if the transaction is not subject to termination (no termination clause) AND 1 of the following conditions apply:...
