Wednesday, August 31, 2016

Involuntary Servitude? [Does the Business Debt Exception Mean Anything?]

In re Parvin, 549 B.R. 268 (W.D. Wash. 2016) is a case that scares me, a lot. The case is one where a doctor had a failed practice and of course had a ton of personal guarantees outstanding that could not be paid.  There appears to be no argument that there is not a Mean’s Test issue because the debtor would meet the business debt exception to the Test.  So as far as Mean’s Test qualification the doctor should be OK in filing a Chapter 7 case.  [For those of you that do not know the Mean’s Test was enacted by Congress to make it a little more difficult to file Chapter 7 bankruptcy if you made over a certain amount of income.]

The Court and United States Trustee appear to focus mainly on the debtor’s Schedule I & J where it shows he has a decent amount of money left over at the end of the month and thus, they believe, he should pay something back to his creditors.  They later argue he should pay 100% back (over a million dollars).  [Again for those of you that do not know I & J lists the debtor’s current income and expenses.]

You may say, why does this scare you?  I routinely deal with failed business fallout and in many of those cases the debtor does have some disposable income left over before paying all of the business guarantees.  It seems as though the business debt exception to the Mean’s Test is being completely ignored in this opinion.  It renders the exception meaningless. 

The debtor in this case will now be subject to the requirements of Chapter 11 bankruptcy where he is charged with being a fiduciary for his creditors.  He will be charged with using his future income to pay creditors apparently 100% of their claims over time.  If he now decides to quit his job or at least quit his second job in another state he will be accused of acting in bad faith and purposely under-working.  This result seems absurd.   

If this case stands it will now require failed business owners to not seek reemployment until after a case is filed.  In this case if the doctor would have simply quit working until after the case was filed he would have probably not came up against this argument by the United States Trustee and would thus not be forced into a Chapter 11 reorganization.

One of the pillars of the bankruptcy code has always been to allow entrepreneurs to take risks by opening a business.  If they fail with no criminal or fraudulent issues then the bankruptcy code has always allowed the individuals a fresh start.  It has not required them to be imprisoned with their debt.  It has been a tool to encourage the entrepreneurial spirit.  Without the fresh start of the bankruptcy the risks will begin to outweigh the potential.

I really hope the debtor in this case has the funds to appeal this decision.  The importance of this goes beyond one doctor and one business.  It may have an everlasting impact on all entrepreneurs.   

Wednesday, July 13, 2016

Specialize or Expert

The terms specialize or expert are not to be taken lightly when you are an attorney.  Specifically Florida Bar Rule 4-7.14 deals with using those words when advertising.  Rule 4-7.14 is titled Potentially Misleading Advertisements and states under (a)(4) that Potentially misleading advertisements include advertisements that include a statement that a lawyer is board certified, a specialist, an expert, or other variations of those terms.

What does that mean in plain English?  It means that an attorney is not a specialist or expert in any particular field unless the Florida Bar has certified them in the area.  It does not matter if they practice exclusively in the field or if they have practiced exclusively in the field for 100 years.  It also means that if an attorney advertises in any form or fashion that they are an expert or that they specialize in the field they are violating the rules of ethics provided by the Florida Bar and could be subject to punishment from the Florida Bar.

The real reason this is important.  It gives potential clients guidance as to who really is an expert and who just says they are.  The Florida Bar, as well as Florida Bar recognized organizations, have very thorough processes by which they determine who may and who may not call themselves and expert in any particular field.  If not for this rule every attorney would call themselves a specialist in any field they choose.

In order to be board certified there are many hoops that an attorney must jump through and many requirements that must be met.  You may ask, “how do you know?”  I just did it.  It took over ten months to finally get through all of the requirements, and as of the date of this post I still am not a specialist because I have to now go through another process to get it on my Florida Bar records, not to mention Texas Bar, DC Bar, and Tennessee Bar. 

What are some of the requirements to become board certified?  One of the requirements is sitting for a full day exam regarding the specialty you are attempting to get certified in.  Another requirement is going through hundreds if not thousands of your cases and disclosing particular litigation issues and opposing counsel information, not to mention personal and professional references.  The board actually reaches out to every last one of them for response.

So next time you are looking for an attorney in any field and see the term specialist or expert.  Do a little digging to make sure you are getting what that claim you are getting.  The Florida Bar and other bar associations keep a record of who is actually board certified.  In a world of banner ads that disappear in a click it is hard to know who is claiming to be a specialist and who really is a specialist.

Jason A. Burgess

Tuesday, May 24, 2016

Did You Really Lose Your Home to a Tax Deed?!

Did You Really Lose Your Home to a Tax Deed?!

The 7th Circuit Court of Appeals recently issued an opinion in In re Smith, 411 F.3d 228 (7th Cir. 2016) that may change tax deed sales forever.  Until Smith I believe that most bankruptcy attorneys felt that once a tax deed is issued on a piece of real property the previous owner was likely doomed.  Given that most case law is clear that the transfer of the property by tax deed conveys the property free and clear of most liens to the bona fide purchaser attorneys never really questioned whether or not they could get the property back, barring any deed or notice deficiency of course.

Now Smith opens up an entirely new avenue.  The Debtors’ attorney in Smith filed the Debtors in a Chapter 13 bankruptcy case after the tax deed sale in an attempt to avoid the sale as a fraudulent transfer.  The Debtors’ attorney claimed that the transfer of the property was a fraudulent transfer because the tax sale was not to a bona fide purchaser for value since the sale was WAY below the actual value of the property.

The United States Supreme Court in In BFP v Resolution Trust Corp., 511 U.S. 531 (1994) addressed a similar argument in a foreclosure sale.  The 7th Circuit differentiated Smith from Resolution because a foreclosure sale does get a reasonably equivalent value to the actual value of the property while the tax deed sale does not even come close to the reasonably equivalent value.

This could be a very good case to keep in your tool belt as a bankruptcy practitioner should a tax deed sale ever come up.  Just remember 11 U.S.C. 548 is the key.

If you have any questions or if you need help please give us a call at 904-372-4791 or email me at