by Lara Shipkovitz, Esq.

An interesting article on the effect preferences and state law fraud statutes can have on recovery for the estate through analysis of the Madoff bankruptcy.

The Madoff trustee, Irving H. Picard, had sought to recover fictional profits paid out in the six years before the collapse, citing provisions of New York State law that allow for a six-year recovery window. The judge also threw out the trustee’s bid to recover so-called preference claims, the cash paid out to the NY Met’s owners in the final 90 days of the fraud.
 
By reducing the time window and eliminating preference claims ­ actions that lawyers said would most likely apply to all the lawsuits the trustee has pending in Federal Bankruptcy Court in Manhattan ­ the decision still “has significant potential ramifications that could affect recoveries as well as distributions” in the legal efforts to unwind Mr. Madoff’s Ponzi scheme, Mr. Picard said in a written statement released on Thursday.
 
Read the details of this action at:
http://www.nytimes.com/2011/09/30/business/madoff-trustee-says-mets-ruling-wont-be-as-bad-as-first-thought.html?_r=1
and
http://tech.mit.edu/V131/N41/long4.html

by Peter J. Ashcroft

As an attorney at Bernstein Law Firm who often represents secured creditors in consumer bankruptcies, the rules that apply to Chapter 13 plans are of great interest.  One Bankruptcy Code provision that provides a crucial protection to mortgage holders is 11 U.S.C. § 1322(b)(2) which provides that debtors cannot modify the terms of a mortgage relating to the debtor’s primary residence.  This means that the debtor cannot modify the principal balance or interest rate.

This rule applies to first mortgages and also to second or later mortgages so long as there is any equity in the property to support the second or later mortgage.  For example, if the debtor has a first mortgage in the amount of $100,000 and a second mortgage in the amount of $50,000, the debtor will not be able to modify the terms of the second mortgage if the property is worth even $1 more than the $100,000 owed on the first mortgage.

A recent opinion from the Bankruptcy Court for the Western District of Pennsylvania written by the Honorable Judge Jeffery A. Deller, however, details one situation where a debtor may modify the interest rate on even a first mortgage on the debtor’s primary residence.  In the case of Mary Ellen Golash – WD PA 09-27973 – Judge Deller found that a debtor could modify the interest rate on a first mortgage down to 0% in the special circumstance where the mortgage fully matured before the expiration of the Chapter 13 plan term (normally 60 months from the date of the bankruptcy filing).

The Court noted that 11 U.S.C. § 1322(c)(2) provides an exception to 1322(b)(2) where the mortgage term matures before the end of the plan term.  So long as the debtor complies with the rules for modifying a secured claim set forth in Section 1325(a)(5)(B)(ii) which require that the debtor provide for full payment of the claim and propose equal monthly payments to the creditor in the plan, the debtor can reduce the interest rate owed to the mortgage holder to 0%.

I found this case to be interesting because it reminded me of the generally strong protections given to primary residence mortgage holders in bankruptcies, but also pointed out one situation where the creditor’s secured claim could be modified.

To see the In re: Golash memorandum, click here.

by Shawn P. McClure, Esq.

It is a very common situation for a creditor to be owed a large sum of money from a debtor who continues to operate by paying other creditors or parties. Naturally, this is very frustrating. It can also be very disturbing because at the same time there are rumblings of the debtor’s financial instability. At this point, the creditor must decide on a course of action.

Certainly, the creditor has the option of filing a state court breach of contract action and working toward obtaining a judgment. However, litigating a lawsuit takes time and even more time is spent to execute on the judgment. The passage of time affords the debtor the opportunity to continue paying others and ultimately wind down the business.

There is another option, which is often overlooked. Force the debtor into bankruptcy. This is done by filing an involuntary bankruptcy petition. The reason for an involuntary bankruptcy is to prevent and protect creditors from unfair activities and treatment by debtors. The greatest advantage to an involuntary bankruptcy is that it forces bankruptcy upon the debtor rather than allowing the debtor to ultimately file on its own terms. This is extremely important because of the ability to recover payments or wrongful transfers by the debtor within certain time frames leading up to the filing of the bankruptcy petition. These payments and transfers can be brought back into the bankruptcy estate to be properly distributed by the bankruptcy court.

In sum, bankruptcy is not always a bad thing for unsecured creditors. It just simply depends upon whose terms the bankruptcy is filed.

If you are interested in reading more about involuntary bankruptcy click here

A recent article about getting ready for the “good times.”

Read the article

by Jennifer L. Tis, Esq.

As a creditor’s rights attorney, I often receive Answers to our Complaints filed Pro Se by  Defendants. Sometimes these Answers are in the proper format and I assume that an attorney prepared the response but declined to enter his appearance. Sometimes, however, they simply consist of a paragraph denying liability for the debt or expressing an interest in entering into a payment plan. Whether or not they are in the proper format is irrelevant, however, if the Defendant is a corporation. Thanks to the Pennsylvania case of Walacavage v. Excell 2000, Inc., 331 Pa.Super. 137, 480 A.2d 281 (Pa.Super., 1984) a corporate entity may only appear in court through an attorney licensed to practice law in the Commonwealth of Pennsylvania. This means that if an individual who owns a corporation files a Pro Se response to a Complaint that names only the corporation as the defendant he is in violation of Pennsylvania law.

The Court in Walacavage also addressed the concern that the requirement of a corporate entity to hire counsel puts corporations at a disadvantage. The Court stated that such a requirement does not deny corporations due process or equal protection under the law. It seems that there are several rationales behind this requirement one of which is the fact that a corporation is technically fictitious so that even if the individual filing the Pro Se response is the President of the corporation, the corporation itself is a fabrication and, therefore, cannot represent itself. Another suggested rationale is that incorporating a business brings many benefits including protection from personal liability. By the same token, however, there are responsibilities that come with such protection including the responsibility to hire an attorney for representation. Finally, it is suggested that the legal issues before the court can become confused when an attorney is not representing a corporation, however, I don’t see how it can be any more confusing for the court than when an individual represents himself…it can be bewildering for everyone involved.  I, personally, believe that the rationale accounting for equal benefits and responsibilities makes the most sense. If an individual wants to remain shielded from personal liability he is going to have sacrifice some benefits that he would otherwise have if not incorporated such as the ability to represent himself in court. You can’t have your cake and represent it in court, too.

                It is always surprising to me how many individuals who have incorporated a business are unaware of the necessity of retaining counsel for a legal matter. In my opinion, the best way to go about dealing with a Pro Se response from a corporate defendant is to file Preliminary Objections to the response. Filing Preliminary Objections to a Pro Se response from a corporate Defendant can save a great deal of time for you and a great deal of money for your client. I find that it often leads to settlement or, better yet, has the effect of getting the response stricken followed by Judgment by Default. From both a financial and expeditious perspective either of these two scenarios is preferable to having to prepare for and attend arbitration or trial as well as requiring your client to send a witness to court.

by Shawn P. McClure, Esq.