By Katherine M. Flett
Under the Bankruptcy Code, “lien stripping” allows a debtor to void a property lien “[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.” Lien stripping is based on the concept that a second claim must actually be secured by collateral of sufficient value to equal or exceed the amount of the secured claim. Section 506(a) of the Bankruptcy Code provides that claims which are only partially secured, or “underwater,” are to be split into two claims – one fully secured and one fully unsecured.
In 1992, the U.S. Supreme Court addressed an important question about lien stripping in Dewsnup v. Timm (1992). In Dewsnup, a Chapter 7 debtor sought to strip the unsecured portion of an underwater lien on her residence under Section 506(d). Specifically, the debtor wanted to reduce her debt of approximately $120,000 to $39,000, the value of the collateral securing her debt at that time. Relying on the statutory definition of “allowed secured claim” in Section 506(a), the debtor argued that her creditor’s claim was “secured only to the extent of the judicially determined value of the real property on which the lien [wa]s fixed.”
The Court rejected this argument, relying on policy considerations and pre-Code practice. The Court concluded that if a claim has been “allowed” under Section 502 and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of Section 506(d). As such, the Court held that the debtor could not strip down the creditor’s lien to the value of the property because the creditor’s claim was secured by a lien and had been fully allowed under Section 502.
The Dewsnup Court defined the term “secured claim” in Section 506(d) as a claim supported by a security interest in property, irrespective of whether the value of the property would be sufficient to cover the claim. Under this definition, lien stripping is limited to “voiding a lien whenever a claim secured by the lien itself has not been allowed.” Dewsnup has been widely criticized as being contrary to the plain language of Section 506(a). Continue reading »
01/25/17 2:50 PM
Bankruptcy, Litigation | Comments Off on Lien Stripping in Bankruptcy after Caulkett |
Lien Stripping in Bankruptcy after Caulkett
By A. Thomas DeWoskin
As most commercial attorneys in Missouri know, the previous Missouri statute governing receiverships, which was enacted in 1939 and consisted primarily of one sentence, provided very little guidance to attorneys, judges, or the parties involved. Missouri’s new receivership statute solves that problem. Effective August 28, 2016, and consisting of some 34 sections, the statute now provides guidance regarding the appointment of a receiver, the powers of a receiver, the rights and duties of the parties, and claim and distribution procedures.
A petition to appoint a receiver is now an independent cause of action. It does not need to be merely an “add on” request to some other claim the creditor has against the debtor. Receiverships can be instituted in order to dissolve an entity, enforce a lien, enforce a judgment, and other specific purposes, as well as any other situations in which the court may find a receivership appropriate.
Commencing a receivership is also a useful new way to resolve an ownership dispute or allow a majority shareholder to challenge a misbehaving management without destroying the business.
One of the most important improvements in Missouri’s receivership process is the requirement of notice to debtors. Continue reading »
01/9/17 1:26 PM
Bankruptcy, Business Law | Comments Off on Missouri Finally Has a New Statute Governing Receivers and Receiverships |
Missouri Finally Has a New Statute Governing Receivers and Receiverships
By A. Thomas DeWoskin
Restaurants fail for a variety of reasons, from failure to watch costs to failure to develop the right menu to a nearby construction project eliminating most of your on-street parking. If you followed the tips in my previous article, you should have some money to rely on going forward.
If your financial problems are operational or managerial, one of the things you can do at this late stage is to hire a consultant to help you tweak your menu, streamline your operations, or take any of a number of additional steps to bring you back to profitability. This is the time to be humble, rather than arrogant – ask for help! You should also consult with a bankruptcy lawyer at this point. That does not mean you are necessarily going to file bankruptcy, but an attorney knowledgeable in this area can tell you what to expect if different scenarios unfold. Unanswered ‘end-game’ questions will add to your stress and divert you from your primary mission of saving your restaurant. You can learn a lot of useful information for not a lot of money, and gain some peace of mind as well.
A bankruptcy attorney also can help with your current problems. For instance, the attorney can negotiate with the landlord, either to reduce the rent or give back some space. He can negotiate with your lender and your suppliers to negotiate better terms, or a temporary break in your monthly payments. Continue reading »
09/19/16 6:00 AM
Bankruptcy, Business Law, Restaurants & Entertainment | Comments Off on Your Restaurant is Failing – Now What? |
Your Restaurant is Failing – Now What?
By A. Thomas DeWoskin
Failure is a topic most restaurateurs would prefer to avoid when setting up a new venture, when their heads are full with visions of success. However, the restaurant business is tough, and problems can arise due to circumstances both within and outside of your control.
A great time to protect yourself from potentially devastating problems is now, while you are setting up your business and you can plan calmly.
In this post, I will discuss several of the initial legal steps you can take to prepare for a potential failure. In my next post, I will turn to the ramifications of failure and what actions you can take at that time.
First, consult an attorney to prepare your initial legal documents. There are many issues of which you may be unaware, or that you may not know how to resolve. You need to choose an appropriate legal structure and learn about human resource issues. Especially if you have a partner, you will want to deal with buyout issues, succession issues and how to handle deadlocks if multiple owners are unable to reach decisions on major issues. As they say, an ounce of prevention is worth a pound of cure. Continue reading »
09/16/16 7:51 AM
Bankruptcy, Business Law, Restaurants & Entertainment | Comments Off on Opening a Restaurant: Plan for Success – and Failure, Too |
Opening a Restaurant: Plan for Success – and Failure, Too
By A. Thomas DeWoskin
You should read this article if –
- You expect to transfer funds to your descendants through an individual retirement account (IRA); or
- You have inherited an IRA from a relative.
The U.S. Supreme Court has ruled in Clark v. Rameker that the money in an inherited IRA does not qualify for the protection from creditors as provided in the Federal Bankruptcy Code.
The Court concluded that funds in an IRA which was inherited from someone else are not really retirement funds. It gave three reasons for this conclusion. The holder of an inherited IRA:
- Can never invest additional money into the account.
- Is required to withdraw money from the account, no matter how far away retirement may be.
- May withdraw the entire balance of the account at any time – and use it for any purpose – without penalty. Continue reading »
06/27/14 3:06 PM
Bankruptcy, Estate Planning | Comments Off on Inherited IRAs – Once Protected – Now Possibly Fair Game for Creditors |
Inherited IRAs – Once Protected – Now Possibly Fair Game for Creditors
By Misty A. Watson
Co-authored by Misty Watson and Samantha Maerz
If you directly inherited an IRA and are facing bankruptcy, these funds are no longer protected from creditors.
In Clark v. Rameker (In re Clark), No. 13-299, the U.S. Supreme Court unanimously ruled that inherited IRAs do not qualify under the “retirement funds” bankruptcy exemption. As a result, non-spouses inheriting an IRA may no longer protect the funds from creditors after filing bankruptcy and spouses have more incentive to “roll over” inherited IRA funds.
Before the Supreme Court decided Clark, there was a split between the 5th and 7th Circuit Courts of Appeals regarding exactly what the “retirement funds” bankruptcy exemption covered. In Chilton v. Moser, the 5th Circuit previously held that inherited IRAs were exempt from the bankruptcy estate because the “retirement funds” exemption never stated that the retirement funds had to be the debtor’s. In Clark v. Rameker, the 7th Circuit disagreed and held that inherited IRAs were not exempt because they were an “opportunity for current consumption, not a fund of retirement savings.” The disagreement stemmed from the interpretation of what “retirement funds” included. Continue reading »
06/23/14 2:38 PM
Bankruptcy, Estate Planning, Trusts | Comments Off on Inherited IRAs Not Protected in Bankruptcy |
Inherited IRAs Not Protected in Bankruptcy
By David R. Bohm
Part of a series on issues related to Manufacturers, Distributors and International Trade
Co-authored by David R. Bohm and David A. Zobel
A major change involving subpoenas to non-parties has hit the business world in the state of Missouri.
A new amendment to the Missouri Supreme Court Rules now requires non-party record custodians to physically appear at deposition to produce subpoenaed items, unless all parties to the litigation have agreed that the subpoenaed party may produce the items without appearing.
The amendment changes the prevailing practice where parties send out subpoenas to third parties with a letter explaining that they will be excused from appearing at deposition if they produce the requested items along with what is known as a business records affidavit.
Rule 57.09, as amended, now requires parties to first obtain consent from all other parties to the litigation before a subpoenaed witness may produce documents without attending the deposition. This agreement must be communicated to the witness in writing. Absent this agreement, a witness must appear to produce subpoenaed items at deposition.
What does this mean to you? If you receive a subpoena, you may only produce the documents to the party serving the subpoena without appearing at deposition if that party represents to you in writing (e.g., in a letter) that all other parties have consented to production of the docume
nts without need for you to appear at the deposition. Such a letter should protect you from allegations that you improperly produced records by mail, instead of bringing the documents to the deposition. You do not need to see the actual agreement. If you have any questions as to whether you can simply mail the documents, instead of appearing at deposition, you should either call your attorney for advice or simply wait and bring the documents at the time and place designated in the subpoena.
Continue reading »
03/28/12 12:30 PM
Banking and Finance, Bankruptcy, Business Law, Employment Law, Health Care, Intellectual Property, Litigation, Manufacturing and Distribution, Real Estate, Tax, Workers' Compensation | Comments Off on Is This by Consent? Changes to Missouri Supreme Court Rule Affect Use of Non-party Subpoenas |
Is This by Consent? Changes to Missouri Supreme Court Rule Affect Use of Non-party Subpoenas
By A. Thomas DeWoskin
I just came across an article on guarding against preferential transfers. If you own a business and one of your customers files bankruptcy, not only are you likely to lose the money the customer currently owes to you, but you might also have to give back some money you’ve recently collected! The bankruptcy laws may deem those payments to be “preferential payments” or “preferences,” which have to be returned to the bankrupt company or to its Trustee. The bankruptcy laws on preference recovery are some of the most unfair laws around because there is no “preferring” requirement to a preference. It’s all just a matter of timing.
If you receive a demand to return a preferential transfer, see a qualified business bankruptcy lawyer immediately. This is not a matter for a consumer bankruptcy lawyers who file cheap bankruptcies for people that have too many credit cards.
There are several defenses to a preference demand. The most common involve “new value” and the “ordinary course of business.”
The “new value” defense is pretty simple – if the debtor paid you an old $10,000 account receivable before it filed bankruptcy, the payment might be recoverable from you as a preference. If, after you receive the money, you extend $10,000 in additional credit, the “new value,” to the debtor, they cancel each other out. Obviously, that defense is a matter of luck, since you don’t know when or if the customer is going to file bankruptcy.
The “ordinary course” defense, however, is something you might be able to prepare for. The bankruptcy laws provide that payments in the ordinary course of business are not recoverable preferences. If you regularly bill your customers on thirty-day terms and it regularly pays according to terms, those payments are being made in the ordinary course of business, the payments you received before the bankruptcy filing generally are safe.
But suppose your customer starts to pay more slowly, or only makes partial payments. You, being a good business person, react to protect yourself. You put the customer on fifteen-day terms, or demand that it provide collateral for future shipments, or take some other action to insure collection. You’ve done the right thing, but future payments are no longer being made in the ordinary course of business! By taking responsible action, you’ve made yourself liable to a preference demand if your customer files bankruptcy.
So – what to do? You try to turn the “out of the ordinary” into the “ordinary”:
- First, make your best efforts to keep the customer as close to ordinary terms as possible for as long as possible.
- If these efforts are not successful, at least try to keep the customer within industry standards.
- If neither attempt works, institute the new terms at the first sign of trouble. If enough time passes before the bankruptcy filing, the new terms will have become the ordinary terms.
As an additional option, you could enter into a new contract with the customer. The new contract could set out the new terms, and provide that you are not obligated to sell to the customer at all. If you choose to sell, however, these are the new ordinary terms of the arrangement.
Being forced to return substantial preferential payments can send your business into bankruptcy itself. Be sure that your accounts receivable staff is sensitive to customer behavior, to the industry’s rumor mill, and anything else that may suggest coming trouble. Review the situation with a bankruptcy attorney to discuss what strategies your company could take, and stay off the receiving end of preference demand letters.
The content of our blogs are never to be construed as specific legal advice and blog-related correspondence never implies the existence of an attorney-client relationship. Please refer to our Disclaimer for more information.
07/6/11 12:23 PM
Bankruptcy, Business Law | Comments Off on Protecting Against Preference Demands in a Bankruptcy Case |
Protecting Against Preference Demands in a Bankruptcy Case