Monday, February 14, 2011

Motions for Relief from Stay and What They Mean for a Debtor


     Very often in bankruptcy cases Debtors are faced with a Motion for Relief from Stay filed by the creditor.  This article attempts to explain the effect of the motion and the burdens of proof required so that everyone, including myself, can understand.
     Upon the filing of any bankruptcy case the “automatic stay” goes into place.  The automatic stay precludes any action against the debtor or property of the debtor’s estate.  Normally secured creditors, such as car lenders or mortgage companies, are the first to file the Motion for Relief from Stay.  This motion normally is asking the court to remove the automatic stay as to the particular piece of property so that the creditor can proceed with its state court remedies against the property, like repossession or foreclosure.
     Upon the filing of the motion, in Chapter 13 and Chapter 11 cases, will set a hearing about 20 or so days out.  At the hearing the initial burden is on the Debtor to prove the particular piece of property is necessary for an effective reorganization.  This step is typically pretty easy if the property is used to make money, like a rental property, or is used by the Debtor in everyday life, like an automobile.  Once that burden is met the creditor must show a few things to get the stay lifted.  The creditor usually must first show there is little to no equity in the property, there has been a default in the original contract, and that the property is indeed not necessary for an effective reorganization.
     Typically if the Debtor meets the burden that the property is necessary for an effective reorganization the court will order some form of adequate protection payment to the creditor.  I will write an entire article on adequate protection later.  But at this point just understand that this is normally some form of cash payment to the creditor.
     If the Debtor intends on surrendering the property then they typically agree to let the stay be lifted so the creditor can foreclose/repossess the property and the Debtor is then done.  Below are two frequent examples.

Example 1:
Debtor files a Chapter 11 bankruptcy and owns a home and a vehicle.   A few weeks after filing the car lender files a Motion for Relief from Stay for the Debtor’s vehicle.  A hearing is set by the Court and the Debtor and creditor appear.  The Debtor first states that the vehicle is necessary because it gets them to and from work, work is obviously necessary for an effective reorganization!  The creditor then shows the court that there is a payment default and the vehicle is worth less than what is owed on it.  Typically the court will order adequate protection payments to start being paid to the creditor.  The exact payment and date will depend on the agreement or judge.  This ruling allows the Debtor to keep the vehicle but also protects the creditor against the depreciation in the collateral.

Example 2:
Debtor files a Chapter 11 bankruptcy and owns a home and a vehicle.   A few weeks after filing the home lender files a Motion for Relief from Stay for the home.  The Debtor no longer wants to stay in the home and does not want to make any more payments on the home.  Typically in this situation the Debtor, through counsel, files a consent to the motion and the stay is lifted.  This means the creditor can foreclose on the home in state court.  Do not be scared however because the Debtor will receive notices from the state court about the foreclosure.  They have to give you notice even though you are in bankruptcy in order to clear up the title.  However they cannot seek the deficiency balance once sold.
     Hopefully this will help you when you receive the motion in the mail from the court.  For more information go to chapter11jax.com or call me at 904-521-9868.  Your particular district may have different rules so make sure to contact a local experienced attorney.

Tuesday, February 8, 2011

New Value Exception to the Absolute Priority Rule

     As discussed earlier the Absolute Priority Rule is difficult to understand.  It gets even more difficult to explain the New Value Exception because it first requires a clear understanding of what the APR means.  The APR in a business case generally means that if the shareholders/owners of the company want to keep their ownership interest then all creditors, including unsecured creditors, must be paid in full.
     One exception to the rule is of course to get the creditors to accept less than the full amount, which is possible in some situations.  However what if the unsecured creditors are playing hard ball and refuse to accept less than 100% but the business cannot afford to pay the entire amount.  That is where the New Value Exception comes into play.
     The New Value Exception states that shareholders/owners can keep their ownership interest if they offer "new value".  The Courts have interpreted the New Value Exception pretty consistently since 203 North LaSalle.  In order for the shareholder/owner to keep their interest they have to give something to the company, normally cash, that is necessary for the effective reorganization.  Also the process normally has to be open to outside bidders.  Below is a brief scenario to help.
     Bob owns an electronics store.  Due to the economy Bob is forced to file Chapter 11 bankruptcy for Bob's Electronics.  Bob has credit card debt as well as vendor debt.  He proposes a Chapter 11 Plan of Reorganization that pays 50 cents on the dollar to unsecured creditors and of course the creditors object.  Bob tries to obtain confirmation through the cramdown provisions of 1129.  If the creditor objects and Bob is not willing to give "new value" then the APR stops confirmation and the case is doomed.
     In order to get the case confirmed Bob will need to give "New Value".  So if Bob proposes in the Chapter 11 Plan that he is going to give $50,000.00 to help fund the plan then he may meet the exception if the $50,000.00 is necessary and substantial for the situation.  Also Bob would need to open up the bidding to see if some other party would be willing to give more than $50,000.00 for the same interest he is retaining.  If Bob does this then the case can be confirmed through cramdown. 
     As you can probably tell the Absolute Priority Rule and the New Value Exception are complex situations that require specialized legal counsel.  Please contact a local attorney that concentrates on Chapter 11 bankruptcy.  If you need more information please feel free to call me at (904) 521-9868 or go to chapter11jax.com.

For more information on the New Value Exception go to:  http://www.hollandhart.com/newsitem.cfm?ID=340

Friday, February 4, 2011

Individual Absolute Priority Rule Update


The Absolute Priority Rule, APR for short, is one of the things in bankruptcy that just seems to be overly complicated.  It is difficult to understand and even more difficult to explain.  I wrote a piece earlier on the APR and how Judge Jenneman in Orlando recently released an opinion that appeared to doom individual chapter 11 bankruptcy cases.  This piece is to follow up on that and show how other courts appear to be handling it.
                Unfortunately it appears that judges throughout the state and even the country are reading the code exactly like Judge Jenneman.  You may ask, what does that actually mean to me or my case?  A year ago when someone walked into my office to file an individual chapter 11 bankruptcy it was easy for me to say that their unsecured debt would only be paid a small portion based upon their disposable monthly income.  Now it is not that simple.
                Now it really depends on the particular facts of your case.  It depends on the amount of debt involved as well as the exact players.  Some cases seem to have no problem with only paying their disposable monthly income and some cases end up having to adhere to the APR.  Now more than ever it is important for you to seek quality counsel when making a decision of whether or not to file Chapter 11 bankruptcy.  If your attorney does not advise you of the risks involved with the APR then ask about it yourself.  If they tell you that you only have to pay your disposable monthly income, ask them about the developments that are occurring now in your area.  It is always a possibility that the attorney just does not understand the APR themselves. 
                If you need further information about the absolute priority rule or how it may affect your particular case please do not hesitate to contact me at jason@jasonaburgess.com or go to chapter11jax.com for more information.