Alabama Bankruptcy Lawyer Blog

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.