Alabama Bankruptcy Lawyer Blog

Can a debtor exempt accumulated Social Security benefits received prior to filing bankruptcy? I thought the answer to this question was yes, based upon Section 407 of Title 42, especially after the 1983 amendment adding subsection (b). While reading a recent 8th Circuit opinion (In re Carpenter, 2010 U.S. App. LEXIS 15772, July 30, 2010) flat out finding benefits exempt, however, I've revisited the matter and am now convinced we have a rule with an exception.

First, start out with Matter of Treadwell, 699 F.2d 1050 (11th Cir. 1983). This decision, released prior to the 1983 addition of subsection (b) to Section 407, held that accumulated benefits received prior to bankruptcy and transferred to an insider within one year were not exempt--the transfer was avoidable. The court held that the right to receive a "future" benefit was exempt, but not an accumulated benefit that has already been distributed.

So now my question is whether the subsequent amendment to Section 407 abrogates Treadwell . LEXIS seems to think so--Shepardize Treadwell and you will see the alert. Treadwell continues to be cited, however, both within and without the 11th Circuit. Those courts outside the the 11th Circuit don't seem to hold the decision in high regard. See, In re Carpenter, mentioned above; see also In re Radford, Case Number 00-41647, W. D. Missouri, Judge Federman, distinguishing or outright ignoring Treadwell.

Treadwell creates or implies an exception to Section 407 when the benefits are not necessary for the care or basic needs of the recipient. In Citronelle- Mobile Gathering, Inc. v. Watkins, 934 F.2d 1180 (11th Cir. 1991) the court reiterated that the "[Eleventh] Circuit has implied an exception to 42 U.S.C. Section 407 when the reaching of Social Security benefits is not going to impair the ability of the recipient to satisfy his or her basic needs." In states (like Alabama) that have opted out of the Federal exemptions, the debtor may claim 407 as a nonbankruptcy federal exemption. The court must, however, determine whether the implied exception is applicable by "determining whether the Debtor has the necessary resources for continuing basic care and maintenance without the accumulated social security disability benefits." See, In re Crandall, 200 B.R. 243 (Bkrtcy. M.D. Fla. 1995) (Judge Arthur Briskman).

To wrap it up, it appears to me that in Alabama and Florida, both of which have opted out of the Federal exemption scheme, a debtor may claim accumulated benefits exempt by virtue of Section 407, BUT, the court must also determine the applicability of the "implied exception" iterated in Treadwell. As a practical matter, I doubt there will be many cases where the debtor will NOT need the accumulated benefits for basic care, but it is a consideration. It is also important to note that Treadwell requires that the Section 407 exemption be affirmatively claimed.

If any bankruptcy practitioners happen on this post and have a different view, or some insight that might clarify this issue further, I would sure welcome it. There is a notable lack of consistency in the case law. Thanks.

Having never done much domestic relations work, I don't have much contact with dischargeability issues from a debtor's perspective. We all remember from a seminar that BAPCPA created an animal known as the "domestic support obligation" ("DSO"), and generally made liabilities in divorce situations, or DSO's, more difficult to avoid. This week, however, I had an inquiry that required a little research into the post-BAPCPA treatment of DSO's in Chapter 13 cases. At the risk if displaying my ignorance, there appears to be a difference in Chapter 13 and 7 with respect to DSO's.

In Chapter 13, the plan is subject to confirmation if it complies with the requirements of Section 1325. Among those requirements is the payment of any claim entitled to priority treatment under Section 507. Pursuant to 507(a)(1)(A), a DSO is entitled to priority treatment. Accordingly, if the plan is confirmed, and the debtor owes something from a divorce settlement or decree that does not qualify as a DSO (example, an obligation to pay attorneys fees), the plan does not have to pay it in full. Only those obligations within the definition of a DSO are entitled to priority.

Of course, the Chapter 7 discharge excludes DSO's from discharge under Section 523(a)(5). But in a bit of a catch-all provision, 523(a)(15) also excepts from the Chapter 7 discharge certain obligations owed to a spouse, former spouse or child of the debtor, that are not within the DSO definition. The language is broad, and basically covers any obligation to pay pursuant to a separation or divorce agreement that is incorporated into a state court decree. A common example that comes to mind is attorney's fees and the obligation of one spouse to pay and hold harmless on marital debts. In Chapter 7, the exception from discharge is accordingly broader. In Chapter 13, you don't have to pay the 523(a)(15) obligations to get a discharge.

Moral of the story? If you want an obligation to be non-dischargeable, you better make sure it qualifies as a DSO. In general terms, this means it must be in the nature of alimony, support or maintenance. Otherwise, he (or she) files Chapter 13 and only has to pay the claims that qualify for priority because they are DSO's. Anything else is a general unsecured claim. When in doubt, and if you are negotiating a settlement agreement, buy a little time with a bankruptcy attorney. If not, and the judge is writing the decree, just give some thought to how your evidence is presented. It's not enough for the judge to call it alimony, support or maintenance. Your evidence should point in that direction.

This very brief post involves a decision that created quite a stir when released, and again when affirmed. United Rentals has petitioned the Supreme Court for a writ of certiorari to review a decision out of the 4th Circuit affirming a preference finding in a case where both bonds and statutory liens apparently assured payment. It will be interesting to see if the Roberts' court agrees to review the case, and if so, whether its "pro-business" leanings are apparent.

The facts: Partition is a subcontractor on two jobs and had rented equipment from United. Partitions ends up in Chapter 7. Within 90 days of bankruptcy, Partition had paid United $75,800. The trustee sought avoidance as a preference.

United argued that since the jobs were bonded, the trustee could not prove it received more than it would have received in liquidation. United also argued new value, since it had released its rights to bond recovery and assertion of a statutory mechanics' or materialmans' lien under North Carolina law.

The bankruptcy court, District Court and the 4th Circuit all concurred: the payments were avoidable as preferences under Section 547. I'm going to keep a close eye on this one. As a Chapter 7 Trustee in a depressed (or "recessed") economy, I'm seeing some contractors in bankruptcy, although frankly, most of my debtor contractors aren't paying anyone within 90 days of filing. United Rentals is, however, an important case, and the Supreme Court's ruling on the petition will I'm sure be anxiously awaited.

My A/C is out, it is 96 degrees outside (SE Alabama) and 89 degrees in the house, the World Cup is over (kind of dull, wasn't it), and what better to do than check email alerts for interesting bankruptcy decisions. This one is noteworthy for both trustees and debtors alike, and indirectly, unsecured creditors.

During the administration of their case, the debtors paid taxes owed to the IRS. Debtors thereafter filed proofs of claim as priority claims for the amounts paid to the IRS. The trustee apparently interposed no objection, and submitted his final application to the court proposing to pay the priority claims filed by the debtors, leaving nothing for distribution to other creditors.

There were, according to Judge Speer, Northern District of Ohio, "two glaring problems with the debtors' position." The case is In re Sarnovsky, 09-30037, July 6, 2010, Northern District of Ohio.

First, priority status under Section 507(a)(8) is expressly afforded only to claims filed by a "governmental unit." Noting that a debtor is defined as a person in Section 101(13), the court held that by implication an individual debtor cannot be a "governmental unit."

Second, by definition a "creditor" is an entity with a claim against the debtor. Since the law does not recognize the right of an entity to enforce a claim against itself, it stands to reason that a Chapter 7 debtor cannot also be a creditor in the same case. The end result is a windfall for the other creditors in the case. The IRS is paid with non-estate funds of the debtors, and is out of the way. The debtors payment is essentially gratuitous (although I doubt debtors have a warm, fuzzy feeling as a result of their generosity), and creditors who would otherwise have received no dividend now receive one.

One might ask: could the priority claim held by the IRS have been assigned to the debtors? I've been down this road informally, and have been told by the IRS and by state agencies that claims either cannot or will not be transferred or assigned. Either pay it off, or don't.

For a bit of clever lawyering, and use of an equitable subrogation argument where a buyer at foreclosure paid taxes to extinguish an IRS right of redemption, see ,Bevan v. Socal Communication Sites, LLC, 327 F.3d 944 (9th Cir. 2003). Buyer bought the property at foreclosure, paid off the taxes owed to IRS, then requested a notice of transfer of claim pursuant to Federal Rule of Bankruptcy Procedure3001(e) (which the clerk honored), and then sought to amend the claim up to the amount of taxes it paid. At the end of the day, the Bankruptcy and District Courts bought into it, but the Ninth Circuit reversed. While not "on point" with the subject of this post, it is close, and one pretty neat piece of legal work.

Debtors write checks, then file Chapter 7 with the balance shown on Schedule B, but before outstanding checks have cleared their account. Is the balance in the bank on the date of filing an asset of the Bankruptcy Estate? Clearly it is, but that is not the problem. By the time the Trustee looks into it, the checks have cleared, and the question becomes: Does the trustee seek recovery, and from whom does the trustee recover the money---the debtor(s), or, the recipient of the funds evidenced by the check?

First a practical comment. Most debtors in Chapter 7 aren't going to have much of a bank balance, or they wouldn't be in Chapter 7. So from a pragmatic point of view, in the vast majority of cases the money at issue is not enough to warrant a turnover action. But, I need something to talk about in this post, so play along with me and assume the debtor had a large bank balance just before filing, wrote out several large checks, and one or more had not cleared. Rather than my pursuing payments as a preference, for which the recipient may have defenses, I would rather just say those were estate funds, now give them back, or lose your discharge (in the event of the debtors) or get sued for turnover (in the case of the recipient). So let's look at some law.

Here's the opening paragraph of In re Pyatt, 486 F.3d 423 (8th Cir. 2007):

"Gary Wayne Pyatt filed a voluntary petition for chapter 7 bankruptcy relief. His petition did not list several checks which had been written prior to his filing but not yet honored. The trustee moved to compel Pyatt to turn over to the estate the value of these checks which amounted to $1938.76. The bankruptcy court granted the motion, and Pyatt appealed to the bankruptcy appellate panel1 which reversed. Pyatt v. Brown (In re Pyatt), 348 B.R. 783 (8th Cir. BAP 2006). The trustee appeals, and we affirm."

So the 8th Circuit did not allow the Trustee to recover the funds from the debtor. The court's reasoning was that by the time the Trustee sought turnover, the debtor no longer had control of or possession of the funds. The checks had long since cleared. The debtor therefore had nothing at that time to turnover. Trustee argued that the critical date was the petition date--that if debtor controlled it then, that was sufficient. The court disagreed, however, and did not allow recovery from the debtor. Trustee would have to recover the funds from the recipient.

Now to the point of all this. In a recent decision out of Florida Middle, In re Brubaker,2010 WL 1260131 (Bkrtcy.M.D.Fla), Judge Paskay saw it differently. The court first found that the balance in the bank accounts on the petition date were property of the Bankruptcy Estate. The money did not leave the account when the checks were written or delivered, but when they were paid or honored by debtors' bank. Fine. What happens next?

The court, though sympathetic to pro se debtors who exhibited no indicia of bad faith, held that the debtors were required to turn over the non-exempt portion of the bank account, in the amount that existed on the petition date, and without any reduction for checks that cleared after the bankruptcy was filed.

Harsh result? I don't think so. The debtors controlled the checkbook and controlled the timing of writing and delivering checks as well as the timing of the filing of their bankruptcy. While they may not have been acting in bad faith, they were nevertheless driving the train, and should bear the burden of any derailments.

You're in the business of selling equipment, and want to cash in by financing, but don't want the hassle of preparing security agreements, filing financing statements, and heaven forbid, repossessing and disposing of collateral in a commercially reasonable manner. So you and your lawyer come up with the idea of leasing instead. Since title never passes, you just go get your equipment if they don't pay.

Right? Well, maybe not!

The age old issue is simply this: if it is a true lease, then fine. Title does not pass, and in case of bankruptcy, the equipment is not part of the bankruptcy estate. If, however, the lease is a disguised conditional sales agreement, then as trustee my next question is "show me your financing statement." Most of the time, there is no financing statement, the property enters the bankruptcy estate, and the "lessor" is now an unsecured creditor.
Here are examples of what I look for as trustee when examining leases, along with a little law for good measure. Note that no one factor is necessarily conclusive, and the courts will look at the totality of the circumstances to determine the intent of the parties.

1. Nominal value purchase option: at the end of the lease term, the "lessee" has the option of purchasing the leased property for nominal value. This is one big red flag. The value at the end of the term should bear some reasonable relationship to the actual value of the property at term's end.

2. Lessee bears risk of loss or damage: if under the lease, the lessee bears all risk of loss, then by inference lessor has essentially conveyed its interest in the property and passed it to lessee, who bears all risk of loss. Or, there is an option to renew the lease for nominal consideration for the remaining economic life of the property; same thing as buy it for nominal value.

3. Lessee bears all maintenance responsibility: this is self-explanatory, and the rationale is the same as #2.

4. Lessee pays all insurance and taxes.

5. The lease is personally guaranteed: why, you might ask, does this matter? If the transaction is truly a lease, and title never passes and you can go pick up your goods, why do you need a guaranty? The presence of a personal guaranty may not alone be sufficient, but it sure makes my nose twitch. See, In re Wakefield, 217 B.R. 967,971 (Bkrtcy. M.D. Ga. 1998)

6. Can the lessee walk away: if the lessee can walk away with no obligation to pay for the goods, this is an almost conclusive indication of a "true lease." Frankly, however, I have never seen such a lease.

Now for some law. First, the question of whether a transaction is a lease of secured transaction will always be one of state law. This implicates some choice of law issues, but that is another subject for another day. And in most every case, it won't matter a great deal because the starting point will be the Uniform Commercial Code.

Your statutory law is Ala. Code, Section 7-1-203, entitled "Lease distinguished from security interest," which is substantively identical to former Section 7-1-201(37).

For a very well reasoned review of the factors to be considered, see the opinion of Judge Keith Lundin in In re Puckett,, 60 B.R. 223 (Bkrtcy. M.D. Tenn. 1986). Closer to home, see Judge Cohen's opinion in In re Winston,181 B.R. 589 (Bkrtcy. N.D. Ala. 1995).

For the view of the IRS, see REV. RUL. 55-540, 55-2 C.B. 39, setting out nine plus factors to consider in distinguishing between a conditional sales agreement and a lease.

And here are the factors considered notable by Professor Barkley Clarke in his often cited treatise The Law of Secured Transactions:, which I set out in the event you don't have immediate access to this treatise:

(1) Is the lessee obligated contractually to pay the full purchase price? If so, the transaction smacks of purchase financing. Some cases use this factor as the only necessary evidence of a disguised secured transaction.

(2) Is there a purchase option and, if so is it nominal? In assessing this critical factor under U.C.C. Section 1-201(37), the court should compare the option price with the anticipated fair market value of the property at the time of exercise, as viewed from the inception of the transaction. Alternatively, the courts have compared the option price with total rentals over the lease term or with the original cost of the goods. The bottom line is the economic reality of transaction, that is, would any lessee in its right mind fail to exercise the purchase option?

(3) Is the lease term equivalent to the economic life of the good? IF it is, there [**16] is no meaningful residual value for the lessor, thus suggesting a financing arrangement rather than a true bailment lease.

(4) At the expiration of the initial lease term, can the lessee renew indefinitely or for a period extending through the economic life of the goods? This factor is of course closely related to the prior two.

(5) Does the lessor retain any meaningful residual value in the goods? When the lessor parts with any residual value because of a termination adjustment clause in an open-end lease which allows the lessor to sell the goods at termination or default, collect any deficiency, or turn over any surplus to the lessee, the transaction looks more like a financing arrangement. In effect, the lessee is guaranteeing the residual value of the leased goods.

This should get you started. And again, let me emphasize that no one factor is conclusive. The court will examine the totality of circumstances and determine what the parties to the transaction intended--a true lease, or a conditional sales contract disguised as a lease. If the latter, you better be perfected.

Thanks for reading.

Judge Williams ruled this week that funds set aside as deferred compensation for certain Colonial Bank employees constitutes property of the bankruptcy estate. The former employees, who were upper management and well-paid employees, may file claims along with other general unsecured creditors. Click here for the Memorandum Opinion.

The deferred compensation plan was what is known as a "top hat" plan. This is a non-qualified plan available only to certain key employees (hence, "top hat"), and is largely exempt from ERISA regulation. Its principle purpose is to defer compensation to a time when it may be taxed at a more favorable rate. Good luck with that!

The respondents did not take issue with the legal premise that the assets of top hat plans are not excluded from the bankruptcy estate. This seems well settled. Instead, they argued that the plan at issue did not meet the requirements for a "top hat" plan. They lost. For additional comment by former employees, you might want to read the article in the Montgomery Advertiser's June 29 issue.

The result is no doubt a hard pill to swallow for the unfortunate non-recipients of the deferred compensation. And at first blush, my concern was whether the employees had been adequately informed (remember, these are highly placed employees). But, from my reading of the findings set out in Judge Williams' opinion, it should have been obvious from plan materials that the funds were not set aside or otherwise protected, and remained assets of the company which were at risk. I suppose the caveat to take from this ruling is to read any plan materials carefully, and consult with your attorney, accountant or tax/investment professional to be sure you appreciate the risks and the potential advantages fully.

As a Chapter 7 Trustee, I consistently encounter questions involving the allocation of tax refunds between a spouse who filed Chapter 7, and one who didn't, where a joint return is filed. My interpretation of the law is pretty simple: the source of the refund will be excess withholdings. The refund should therefore be pro-rated based upon the percentage of withholdings attributable to each spouse. If a spouse does not pay anything in, he or she is not entitled to the refund.

So what does this say to the spouse who does not work outside the home, but nevertheless provides a valuable contribution? Not much, I'm afraid, except that neither the law nor the life guarantees a result that is altogether fair to every one all the time

The basis of my position is Gordon v. United States, 757 F.2d 1157, 1160 (11th Cir. 1985). Gordon is, admittedly, a tax case. The court reasoned that the question of "who owns what" part of a tax refund depends upon who paid in what withholdings. "Where spouses claim a refund under a joint return, the refund is divided between the spouses, with each receiving a percentage of the refund equivalent to his or her proportion of the withheld tax payments. See, e.g., Rosen v. United States, 397 F. Supp. 342 (E.D.Pa.1975); United States v. Mooney, 400 F. Supp. 98 (N.D.Tex.1975)."

The issue has also been addressed in a bankruptcy context in the Middle District of Florida, where the court held:

"The filing of a joint tax return does not affect the underlying property interests of the parties. U.S. v. Elam, 112 F.3d 1036, 1038 (9th Cir. 1997). Spouses filing a joint return have separate interests in any overpayment, the interest of each depending upon his or her income, i.e., an overpayment is apportionable to a spouse to the extent that he or she contributed to the overpaid tax." Rosen v. United States, 397 F. Supp. 342, 343 (E.D. Pa. 1975). See also Gordon v. United States, 757 F.2d 1157, 1160 (11th Cir. 1985) ("Where spouses claim a refund under a joint return, the refund is divided between the spouses, with each receiving a percentage of the refund equivalent to his or her proportion of the withheld tax payments."); Gens v. United States, 230 Ct. Cl. 42, 673 F.2d 366, 368 (Ct. Cl. 1982), cert. denied, 459 U.S. 906, 74 L. Ed. 2d 167, 103 S. Ct. 209 (1982), and reh'g denied, 459 U.S. 1081, 74 L. Ed. 2d 642, 103 S. Ct. 503 (1981) (holding that Wife was not entitled to any part of the overpayment for failure of proof that she paid any part of it). Claimant's interest in the refund check therefore equals the amount which she contributed to the 1991 income taxes."
In re Jones, 219 B.R. 631, 635 (Bankr. M.D.Fla. 1998).

So back to my simple formula: ownership of tax refunds directly correlates to the amount contributed to withholdings by each taxpayer. This position does strike me as wholly consistent with the rationale of the court in Gordon.

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Not according to the Fifth Circuit, applying Louisiana law to determine the meaning of "property" or "interest in property." Here's the short version of the facts in In re Laughlin, 602 F.3d 417 (5th Cir. 2010).

On June 4, 2007, debtor completed a procedurally proper pre-petition disclaimer of any interest in his father's estate. On July 21, 2007, he filed Chapter 7. The trustee filed an AP seeking denial of discharge on the grounds debtor's renunciation was a transfer of property made within one year of bankruptcy with the intent to delay, hinder or defraud creditors. The Bankruptcy Court agreed, applying the rationale of the U. S. Supreme Court in Drye v. United States, 528 U.S.49, 120 S.Ct. 474, 145 L.Ed. 2d 466 (1999)(holding that a disclaimed interest was "property" subject to IRS liens). The District Court affirmed. The 5th Circuit, however, saw it differently, finding Drye inapplicable.

The issue, in a nutshell, is whether the disclaimer of an inheritable interest operates as a "transfer" of "property" or a "property interest." If there was no transfer of property or a property interest, that is the end of the discussion. Now, the question of whether a transfer has occurred is one of federal law, since the applicable statute defines "transfer." That part is easy enough. The difficulty arises, however, in defining "property" or "property interest" since neither is defined in the Bankruptcy Code. It thus becomes necessary to look to state law.

Most states appear to employ a "relation back" fiction to hold that if you disclaim an inheritable interest, that disclaimer "relates back" so that the beneficiary never receives or possesses the interest. There is accordingly nothing to transfer, and there can be no fraudulent transfer for purposes of Section 727. Alabama's statute (Ala. Code 43-8-294) reads similarly to those from states cited in McLaughlin, in expressly providing for relation back. I would suspect the Eleventh Circuit would see it similarly if presented with the question.

A few months ago, I discussed the decision of a Delaware bankruptcy court in which a contractually created triangular setoff arrangement was found to be violative of Section 553's mutuality requirement. The case was In re Semcrude, L.P., Case No. 08-11525 (BLS), 2009 WL 68873 (Bankr. D. Del. January 9, 2009). In a relatively short opinion released April 30, 2010, the District Court affirmed, adopting without revision the Bankruptcy Court's rationale and conclusions. The citation to the District Court's decision is In re Semcrude, L.P., --- B.R. ---, 2010 WL 1737103 (D. Del. April 30, 2010).

For the typical practitioner, myself included, triangular setoff will rarely, if ever, be an issue. I just happen to have a case in which the issue is pivotal, and thought the affirming opinion by the District Court was well worth noting. We'll have to wait and see if it is appealed further.

Just reading this one causes all twelve of my hairs to stand on end. The case is Marathon Petroleum Co. v. Cohen [In re Delco Oil, Inc.], Case No. 09-11759, 2010 U. S. App. LEXIS 5452 (March 16, 2010). Here is what happened.

Debtor files Chapter 11, and wants to fund continued operations with cash collateral and files a motion seeking court approval. The creditor secured in the cash collateral objects vehemently. The bankruptcy court takes about 3 weeks to rule, at which point it denies the debtor's motion to use cash collateral. In the meantime, the debtor has been purchasing product from Marathon, and paying for it (with the cash collateral), all post- petition. The case eventually converts to Chapter 7 (without cash collateral, the Chapter 11 case was toast), and the Chapter 7 trustee seeks recovery of the approximately $1.9 million paid to Marathon by debtor for the purchase of post-petition goods. The bankruptcy court agrees, holding that the payments were unauthorized post-petition transfers of estate property avoidable under Sections 549(a) and 363(c)(2). Score one (a big one) for the trustee; the11th Circuit affirms.

Section 549 of the Bankruptcy Code is an avoidance section specifically directed to post-petition transfers. It allows the trustee to avoid a post-petition transfer "that is authorized only under section 303(f) or 542(c) OR "that is not authorized under this title or by the court." Since the bankruptcy court did not approve the use of cash collateral, and did not authorize the the post-petition business arrangement with Marathon, the payments made to Marathon were recoverable by the Chapter 7 Trustee.

The lesson here was a tough one: if you want to sell to a Chapter 11 debtor, be sure to call creditor's counsel first, and avoid a very nasty learning experience. Post-petition transfers of estate property must be court authorized.

Here's something you don't see every day! About 8 months into a confirmed Chapter 13 plan, debtor-husband's mother dies leaving him (1) a $162,000 IRA; (2) $20,000 equity in real property; (3) $14,000 in a bank account; and, (4) a late model vehicle. Debtors blew most of it, then sought conversion from Chapter 13 to Chapter 7, ostensibly due to an impending job layoff. The case converted to Chapter 7, but the trustee sought a variety of remedies to recover the value of the inherited property.

Clearly, the inherited property was a post-confirmation asset of the Chapter 13 estate. When a Chapter 13 converts to 7, Section 348(f)(1)(A) provides that "property of the estate in the converted estate shall consist of property of the estate, as of the date of the filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion." In other words, the Chapter 7 estate essentially consists of what the debtor owned when the Chapter 13 was filed.

There is, however, an exception which I've only seen rarely applied. Section 348(f)(2) provides that if the conversion is made in "bad faith," the property of the Chapter 7 estate consists of everything at conversion. Judge Rhoades found from the totality of circumstances that the conversion in this case was in bad faith. The trustee was accordingly permitted to seek recovery of the dissipated assets on the theory the stay had been willfully violated, in addition to the traditionally asserted avoidance actions.

The case is In re Mullican,417 B.R. 389 (Bankr.E.D.Tex.2008), aff'd at 417 B.R. 408 (E.D.Tex. Aug. 4, 2009).

From my perspective as a trustee, the decision highlights the importance of inquiring into the motive behind conversion. In the vast majority of cases, the need is legitimate and most assuredly done in good faith. And fortunately for Chapter 7 trustees in the Middle District of Alabama, we have an excellent Chapter 13 trustee and staff who are good to alert us to any possible assets in converted cases. What makes this case distinct is the fact that the asset was acquired after the filing of the Chapter 13, which in most instances means the converting debtor gets to keep it. Thanks.

It's bad enough to get a notice of the commencement of a bankruptcy case in the mail. To add insult to injury, it is a Chapter 13 case, and debtor proposes to halve the value of your collateral (a very fine motor vehicle) and drop your interest rate from 14% to 4.5%. Why even bother getting a note signed? Or getting out of bed? Can they do this?

I have a short article on my website which deals with interest rates, secured claims, and Section 910 claims in a bit more detail. But for now, a few basics.

First, the debtor has to pay you the present value (that's where the interest comes in) of that part of your claim that is allowed as secured. This is required for confirmation by Section 1325. More on the allowed amount of your secured claim another day. Let's assume your principle balance is $10,000 and your vehicle collateral is worth $5,000 and that you didn't finance the vehicle within 910 days of bankruptcy (a Section 910 claim). You have a secured claim of $5,000 and an unsecured claim for the balance. Question: what rate of interest does debtor have to pay to meet the "present value" requirement?

This question was answered, for the most part, by the United States Supreme Court's decision in Till v. SCS Credit Corp.,, 541 U.S. 465, 124 S. Ct. 1951, 158 L.Ed.2d 787 (2004). In Till, the Court held that the rate payable is the prime plus rate, or the national prime rate (or the "fed rate"), plus a debtor specific rate adjustment for risk of non-payment. The Court specifically rejected the contract rate as being determinative. It is also worthy of note that the debtor specific rate enhancement for risk was a plurality finding, and not a majority. Justice Thomas specifically rejected the notion of a debtor specific risk enhancement. For a case in the Middle District in which the court declined to enhance the prime rate, take a look at In re Yelverton, 06-10664-DHW, Middle District of Alabama, which is found on the court's searchable website.

At present, the national prime rate is 3.5%, and has been for some time. In the Middle District, it seems customary to use a 1% enhancement, and a fairly typical rate is 4.5%. Should there be circumstances indicating a higher than usual risk of non-payment, the court could certainly enhance the rate further. But my suspicion is that you will need some compelling facts to get beyond a 1% enhancement. There is risk on any loan (why else require collateral), so most often, you lose this argument. Your better recourse is to try and get the secured portion of your claim increased.

To most sellers of goods, reclamation means nothing--never heard of it. And in most instances, the seller is not going to get its goods back anyway. But, there is a feature of the reclamation remedy recognized by the Bankruptcy Code which bears consideration.

First a brief summary. Under the Uniform Commercial Code, a seller of goods has the right to reclaim those goods under certain circumstances, and within a specified period of time. This provision is codified in Alabama at Ala. Code Section 7-2-702. The Bankruptcy Code, in Section 546, recognizes this remedy by making the rights and powers of a trustee subject to the right of a seller to reclaim its goods. But, that's not what I want to talk about, for this reason. Most of the time, a debtor's inventory is subject to a floating security interest. Once the seller's goods enter the debtor's inventory, the goods become subject to the floating security interest and and can't be reclaimed unless their value exceeds the secured debt (not likely). Is the seller now shot on the ground?

Section 546(c)(2) directs you to Section 503(b)(9) of the Bankruptcy Code. Section 503(b)(9) provides for an administrative expense claim for the "value of any goods received by the debtor within 20 days before the commencement of a case . . . sold to the debtor in the ordinary course of such debtor's business." The seller may not be able to reclaim its goods, but an administrative expense claim puts you ahead of unsecured creditors in the event the Trustee distributes a dividend.

So what should you do? First, follow the UCC procedure for giving proper notice of reclamation, in the event your goods have not become subject to a prior security interest. On my website you will find a summary of the reclamation procedure, and a sample notice letter.

Second, file an administrative expense claim under 11 U.S.C. Section 503(b)(9) for the value of the qualifying goods. This is very simple. In my years as a Trustee, however, I've yet to see one. So if you sold goods to a debtor, in the ordinary course of business, within 20 days before commencement of the bankruptcy case, call your lawyer. You might not get your goods, but you could have an administrative expense claim ahead of unsecured claims in the event there are assets for distribution. Think of it as moving closer to the front of the line.

This post involves a little bit of my creditor's counsel hat, and a little bit of my trustee's hat. Stated otherwise, I've done it to others, and, I've had it done to me.

Prior to the BAPCPA amendments in 2005, a trustee could file a complaint to recover a preference in the district in which the bankruptcy case was filed, notwithstanding the residence of the defendant. As a trustee in Chapter 7 cases, I can assure you that a perpetual home court advantage was an enormously powerful tool. Most creditors simply could not afford to come to Alabama Middle to litigate a small preference action.

Well, Congress in its infinite wisdom, and no doubt with the influence of a few lobbying dollars, changed all that in 2005. The law now reads as follows:

(b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $ 1,100 or a consumer debt of less than $ 16,425, or a debt (excluding a consumer debt) against a noninsider of less than $ 10,950, only in the district court for the district in which the defendant resides.

In a nutshell, if a trustee wants to seek recovery of a preference involving a consumer debt of less than $16,425, or, a non-consumer debt of less than $10,950, the action must be filed in the district where the defendant resides. Or, must it?

Back in 2008, in the case of In re Rosenberger, 400 B.R. 569 (Bankr. W.D. Mich. 2008), the court held that the venue limitations of 28 U.S.C. Section 1409(b) did not apply to preference actions. Here is the problem.

Section 1409(a) provides as follows: (a) Except as otherwise provided in [**3] subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.

Section 1409(b) provides as follows: (b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $ 1,100 or a consumer debt of less than $ 16,425, or a debt (excluding a consumer debt) against a noninsider of less than $ 10,950, only in the district court for the district in which the defendant resides.

Note that in (a), the statute employs the terms "arising under" and "arising in or related to." But, subsection (b) uses only the terms "arising in or related to." Since a preference action is an action "arising under" the Bankruptcy Code, and since subsection (b)'s limitations apply to cases "arising in or related to", Congress must not have intended the limitations to apply to venue actions.

The Rosenberger decision is certainly not a new development. It was not appealed, however, nor has it been cited negatively by other courts. As of this writing, I haven't had occasion to raise the argument, nor has it been raised against me. I mention it only for the purpose of pointing out that the venue limitations of 28 U.S.C. Section 1409(b), believed by many to be a protection against small preference actions, may not be much protection.