how to prepare corporate and individual debtors for ......depending on state law, the filing by one...

201

5Peter J. Gurfein, ModeratorLandau Gottfried & Berger LLP; Los Angeles

Jessica C.K. BoelterSidley Austin LLP; Chicago

Ford ElsaesserElsaesser Jarzabek Anderson Elliott & Macdonald, Chtd. Sandpoint, Idaho

Daniel R. WilliamsFenix Financial Forensics LLC; Scottsdale, Ariz.

How to Prepare Corporate and Individual Debtors for Bankruptcy

How to Prepare Corporate and Individual Debtors for bankruptcy

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391

CHAPTER 7 COUNSEL

DON’T BEE A DON’T BEE

By Ford Elsaesser

With apologies, (but no licensing fees paid), to Romper Room, we suggest that there are Ten Rules that Chapter 7 debtors should follow, so as to avoid becoming a DON’T BEE with regard to the highest standard of professionalism in representing individual Chapter 7 debtors. These Ten Rules are based upon experiences of a bankruptcy trustee in nearly 40,000 Chapter 7 cases over 32 years, and represent the most common mistakes, oversights, or “inattentive lawyering,” sometimes totally innocent that occur, and can almost always be avoided in most cases.

A guiding principal with credit to Donald Rumsfeld is that you “don’t know what you don’t know,” and the only way to extract that knowledge is to cover the waterfront with your prospective Chapter 7 debtor. It is our theory that if all Chapter 7 debtors’ counsel followed these Ten Rules, then passage through Chapter 7 will be much smoother, and for the debtor, ultimately rewarding—especially compared with the alternative.

Rule #1: DON’T BEE a Chapter 7 debtor’s counsel who does not thoroughly explore personal injury and other claims by the debtor. Every state has different exemptions with regard to personal injury and other claims (such as employment or discrimination) are claims held by the Chapter 7 debtors. One thing is certain, however; such claims are universally held to be property of the estate unless fully exempt (and without objection) or abandoned by the trustee. Problems often occur, however, when the Chapter 7 debtor is a member of a national or regional class action, but does not realize it either because he or she has not paid attention to class notices or simply does not understand the concept. As has been reported in many cases, the failure to disclose such a claim can result in judicial estoppel, preventing any recovery for the debtor, whether it involves a drug or surgical procedure class action or a personal injury lawsuit.

To avoid being a DON’T BEE, thoroughly examine the debtor, not only as to personal injury claims he or she may have, (but may not even have retained counsel for such, or otherwise pursued), as well as some of the more well-known current class actions in which he or she might be a participating class member. DON’T BEE a Chapter 7 debtor’s counsel who has to seek to reopen a case two or three years later to try to protect an otherwise estopped personal injury claim, and at the same time, try to maximize the exemption claim for your debtor. No amount of vetting on this issue is really too much.

Rule #2: DON’T BEE a Chapter 7 debtor’s counsel who does not thoroughly analyze the impact of separated and divorced spouses. Depending on state law, the filing by one spouse can have a significant impact on community or marital property, not only under § 541 of the Bankruptcy Code, but can have substantial impacts on the non-filing spouse or ex-spouse, while not benefiting at all.

A Chapter 7 debtor’s counsel cannot thoroughly analyze the impact of the dischargeability issues under § 523(a)(15) without reviewing the decree of divorce and analyzing its impact. Likewise,

392

2015 SOUTHWEST BankrUpTcy cOnFErEncE

with separated spouses who do not intend to jointly file, combining divorce and bankruptcy planning often make ultimate sense. As much as you hate family law, DON’T BEE a Chapter 7 lawyer who does not fully analyze the impact of a prior or pending divorce.

Rule #3: DON’T BEE a Chapter 7 debtor’s lawyer who, due to the anxiety of the debtor(s) or the desire to book another case, does not fully explain the advantages of “waiting.” As pointed out in some of the following Rules, in the absence of recurring garnishments, waiting can have a substantial beneficial effect for a myriad of reasons. DON’T BEE a Chapter 7 debtor’s counsel who does not ask the debtors and himself or herself whether waiting will enhance the debtor’s exemptions, avoid difficult avoidance claims, or even avoid the opportunity to avoid Chapter 7 in the future.

Rule #4: DON’T BEE a Chapter 7 debtor’s attorney who does extreme exemption planning. What is extreme exemption planning? Courts have adopted varying standards, but experienced debtor’s counsel and trustees know it when they see it. Few are troubled by taking a $7,000 tax refund and buying a more-drivable vehicle than currently owned. Taking $50,000 in nonexempt securities and transferring them into $25,000 ROTH-IRA’s for each spouse is bound to raise hackles and potentially subject the debtor to the impact of § 727 and/or § 548. If exemption planning makes sense from a state law perspective to protect execution and garnishment, then DON’T BEE a Chapter 7 debtor’s lawyer who does not obey Rule #3—WAIT!

Rule #5: DON’T BEE a Chapter 7 debtor’s attorney who does not review one of the freely-available credit reports of the debtor to ensure that the Schedules, particularly Schedule F, identify all creditors. Further, DON’T BEE a Chapter 7 debtor’s lawyer, when in doubt, who does not name the Internal Revenue Service and the state taxing authority as Schedule F creditors, just in the occasional, (but common) circumstance where the Internal Revenue Service or state taxing authority has an unsecured, non-priority claim that the debtor has forgotten about or otherwise ignored. Being thorough in this area saves Schedules amendments, and more expensive, later motions to reopen the case to include omitted creditors.

Rule #6: DON’T BEE (since 2005) a Chapter 7 debtor’s attorney who does not thoroughly analyze the impact of § 522 with regard to the debtor’s residency. The residency requirements for which exemptions are appropriately claimed can create absurd and sometimes harmful results for the debtor, if not carefully analyzed. A homestead exemption of $100,000 that totally protects the debtor’s equity under state law may be worthless to a debtor who lived in a low exemption state under § 522. At the very least, analyze what adoption of Rule #3 (WAIT!) might do to maximize the debtor’s ability to claim exempt property.

Rule #7: DON’T BEE a Chapter 7 debtor’s lawyer who ignores the impact of LLC’s owned by the debtor. Many small business and home business Chapter 7 debtors, unfortunately, due to media and Internet advertising, are convinced they needed to create one or more corporations, or in the modern era, LLC’s. To the extent assets are on the books of an LLC that might otherwise be exempt under state or federal wildcard, tools of the trade, professional instruments, etc., exemptions, have no exempt-ability when they have been put on the books of the LLC. And, by the way, saying “d/b/a or f/d/b/a” does not work, either.


393

If there are assets of value in the LLC that, if owned by the individual, could be claimed as exempt, then take the simple approach (in most states) of dissolving the LLC, and vest the assets back in the debtor.

Rule #8: DON’T BEE a Chapter 7 debtor’s attorney who files on a small amount of unsecured debt, when the debtor is neither being sued nor garnished. All Chapter 7 trustees have seen far too many cases where debtors have filed Chapter 7 on relatively nominal amounts of debt, in situations where they are neither being garnished nor sued by a collection agency. For the same fee that you charge for filing a Chapter 7, you could probably compromise most of the unsecured debt to small percentages, or simply counsel the debtor to avoid the nasty phone calls, much easier today in the era of few land lines or smart phones, as well as the ability to block calls and emails. If the debtor has a major uninsured medical expense two years later and truly needs Chapter 7 when the collection agency for a dozen different medical providers are garnishing 25% of his or her take-home wages, he or she will thank you for being a proud adopter of Rule #3—WAIT!

Rule #9: DON’T BEE a Chapter 7 debtor’s counsel, who in states where tax refunds are not exempt, does not drill the tax refund turnover principles into the debtor repeatedly, or counsel the debtor to wait until the refund has been utilized on exempt assets or living expenses. Every year, in some jurisdictions, multiple debtors lose their discharge by not turning over their tax refunds, and spending it on what are legitimate “urgent” expenses. If your debtor cannot wait until the refunds have been received and appropriately spent before filing, then extract, in blood if necessary, a promise that the refunds will be brought directly to your office to avoid the very real possibility of having the discharge go up in smoke.

Rule #10: DON’T BEE a Chapter 7 debtor’s lawyer who does not analyze the impact of preferential transfers and § 548 transfers on the family and friends (and sometimes employers) of debtors. Often Chapter 7 debtors, in the two years before bankruptcy, make transfers (often with exempt property) to repay family and friends who have helped them out. A typical example would be that the debtor receives a $5,000 tax refund that, depending on the state, may be exempt, or could otherwise be used to acquire exempt assets or simply pay some living expenses, such as rent, utilities. Instead the debtor pays Mom and Dad the $5,000 that the parents loaned the debtor. If that happened within a year, it may very well be preferential. Similarly, gifts to parents, siblings and children can create significant exposure. Be sure to thoroughly cover with the debtor, beyond what is set out in the legal-eeze of the Statement of Financial Affairs, every repayment or other transfer that might create exposure to family and friends that the debtor clearly does not want to see occur. Absent continuing garnishments, the solution is, as almost always is, to adopt Rule #3—that is, WAIT!


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LAS

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Presen

ted by

Peter J. G

urfein

Land

au Gottfrie

d & Berger LLP

1801

Cen

tury Park East, Suite 700

Los A

ngeles, C

A 90

067

Office:

310.691.7374

Mob

ile:

310.584.1100

Fax:

310.557‐0056

Email:

pgurfein@lgbfirm

.com

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-det

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415

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416


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LP4


417

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entia

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ill b

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418


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LP6


419

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IN L

LP7


421

For Notes

1

Presented by:

Daniel R. Williams

Fenix Financial Forensics LLC10565 N. 114th St., Suite 100Scottsdale, AZ 85259

Office: 480.717.6704Mobile: 312.404.1122Fax: 480.717.6734

Email: [email protected]

1

20 WAYS TO PREPAREMANAGEMENT FORBANKRUPTCY’S…

GAME OF THRONES

“Fear cuts deeper than swords.”– George R.R. Martin, A Game of Thrones

2

422


For Notes

2

“Most men would rather deny a hard truththan face it.”

– George R.R. Martin, A Game of Thrones

THE DIRTY DOZEN3

The Dirty Dozen - #14

1. Your denial will kill you


423

For Notes

3


2. Listen to experiencedfirst responders


3. Being in a zone, puts you on a target

424


For Notes

4


4. Train yourself on fundamentals


5. Everything privatewill be public


425

For Notes

5


6. You are not ready no matterhow ready you are


7. The next thing youhear will be a giantsucking sound

426


For Notes

6


8. Your life will be defined bydeadlines


9. This blind datemay turn outawkwardly


427

For Notes

7


10. Playing in a sandbox


11. Employee “Death Spiral”

428


For Notes

8


12. Star playersbecome free agents

“A mind needs books as a sword needs awhetstone, if it is to keep its edge.”

– George R.R. Martin, A Game of Thrones

BEHIND THE EIGHT BALL16


429

For Notes

9

Behind the Eight Ball - #117

1. Show me the money


2. The affair is over, come cleanwith your lender

430


For Notes

10


3. Collateral meanscollateral


4. Take a DIP


431

For Notes

11


5. Spend some time on the SOFA


6. Know your way out beforeyou enter that door

432


For Notes

12


7. Preference is prohibited


8. Paint your picture


433

For Notes

13

Any AdditionalQuestions?

Presented by:

Daniel R. Williams

Fenix Financial Forensics LLC10565 N. 114th St., Suite 100Scottsdale, AZ 85259

Office: 480.717.6704Mobile: 312.404.1122Fax: 480.717.6734

Email: [email protected]

26

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