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 Lara Shipkovitz, Esq.

Recently in Pennsylvania a Westmoreland County Judge ruled that landowner gas leases need not have both parties signatures to be valid in Snyder v. Rex Energy., Case No. 09CI06332.  Local landowners brought suit against Rex alleging the company reneged on a deal to lease their properties for Marcellus Shale drilling.  Rex maintained the leases were unenforceable because they never signed the leases.  Accordingly, the Company argued no contract existed.  The landowners argued that a contract was entered when they signed the leases that were prepared by the company without making any changes to the lease; meaning, this constituted a valid acceptance of the terms offered by Rex.  Judge Caruso agreed stating that the leases, unlike those in other cases, did not contain the express requirement that the company sign them to be valid. The issue was considered early on in the pleadings and later, the parties settled.  Ultimately, Rex agreed to five year leases, including bonus payments and royalties for the landowners.   In light of the increasing rulings and considerations of Marcellus Shale issues, it is more than ever for a landowner to understand  his/her legal rights and obtain experienced counsel for any transaction affecting these rights.

 Check out our Marcellus Shale website and feel free to contact us (news@bernsteinlaw.com) if you have any questions.

by Jennifer L. Tis, Esq.

One thing that I’ve noticed time and time again in my practice is that clients are not always aware that they may need to appear in court at some point if they choose to take legal action against a debtor. In Pennsylvania, if the matter is not settled or if judgment is not obtained prior, it will go to either arbitration or trial. The factor that determines which type of hearing you will have is the amount for which you are suing. If that amount is over a certain limit (usually $25,000.00 or $50,000.00 depending upon the county) your case will go to trial and if it is below a certain amount it will go to arbitration. The arbitration that I refer to, however, is through the Court of Common Pleas and is not affiliated with the American Arbitration Association. It operates much like a trial except for the fact that your case is presented to a panel of three attorneys as opposed to a Judge. What many creditors do not realize is that regardless of whether the matter will first be scheduled for arbitration or trial, a witness must physically appear at the hearing to testify on behalf of the Plaintiff. I have been asked many times whether the witness may ‘appear’ by telephone. This has never been allowed in Pennsylvania Courts and it is expected that if you file suit in Pennsylvania you, or a credible individual with first-hand knowledge of the matter, are able and willing to appear in Pennsylvania Courts in regards to that suit. Although many cases come to an end through either settlement or judgment, by default or otherwise, long before trial or arbitration is scheduled , one must always prepare for a potentially lengthy litigation. Therefore, I would urge anyone considering filing suit in Pennsylvania to first ask themselves whether they will be able to travel to the county in which the suit is filed for one or more hearings. If the answer is ‘no,’ such action should be reconsidered so as not to spend even more money chasing a debtor who has already caused you a loss.

by Maribeth Thomas, Esq.

Alternate dispute resolutions such as mediation have become prevalent in bankruptcy proceedings and often result in much success for all parties involved. Mediation is not an official judicial proceeding and instead is designed to encourage collective agreement amongst parties to a dispute. The mediation process is informal and is most often entered into voluntarily by the parties.

In particular, mediation can be especially effective in Chapter 11 bankruptcies as a tool to construct a consensual plan of reorganization. The mediation process provides the debtor with an opportunity to negotiate, with the assistance of a neutral third party, with creditors in an informal setting to reach a settlement that is fair and in the best interests of all involved parties. Furthermore, by providing the debtor with an opportunity to resolve claims outside of court, both money and time can be saved by avoiding potentially expensive and lengthy litigation.

Mediation may also be useful in the chapter 7 context to resolve disputes involving preference, avoidance, non-dischargeability, fraudulent conveyance and claims allowance actions. Most recently, jurisdictions have implemented mediation procedures to prevent foreclosures. Such programs have been pioneered in Florida courts and require the debtor to file a chapter 13 bankruptcy. The programs work to reduce foreclosures by reducing monthly payments and, in certain instances, forgiving mortgage principal. Early statistics demonstrate that the programs created by bankruptcy courts are significantly more successful in stopping foreclosures than programs implemented in the state court system.

The Bankruptcy Court for the Western District of Pennsylvania has adopted mediation procedures as a method of dispute resolution under Local Rule 9019-2. General Court Procedure # 4 establishes the specific requirements and standards for the mediation process. While the court can direct a party to mediation, a party may request mediation from the court through a signed stipulation or by the filing of a motion. It is important to remember that the mediation process does not delay any other proceedings in the bankruptcy case. If the mediator assigned to the case requires compensation, such costs are usually shared between the parties involved in the mediation. Each party and its primary attorney, must be present at the scheduled mediation conference, as well as any other parties in interest whose presence is necessary for a full resolution of the matter. Importantly, all material, both oral and written, that is produced at a mediation conference is to remain confidential. However, any material presented at the conference that would otherwise be discoverable or admissible is not exempted from discovery in a court proceeding merely by its use in mediation. If the parties are able to reach a settlement through mediation, the mediator must submit a fully executed stipulation to the court within twenty days after the conclusion of mediation. If the mediation conference does not result in a successful resolution of the dispute, the matter proceeds as scheduled before the court. For a full description of the procedures for mediation before the Bankruptcy Court of the Western District of Pennsylvania, please refer to the court’s General Court Procedures which can be found on the court’s website: http://www.pawb.uscourts.gov/.

By Jennifer Tis, Esq.

Undoubtedly, social networking sites such as Facebook will change the face of the legal practice in a number of ways, some foreseeable, some not. Already, Facebook has been used in criminal investigations, used for “cyber-bullying” and has been the subject of privacy disputes due to school administrations’ use of Facebook to suspend students for activities such as underage drinking.
Facebook has also been a sought-after source of information for attorneys involved in active litigation in a variety of areas of the law. Whether it’s a civil or criminal matter, a case can often be expeditiously closed due to a few posts made by either the Plaintiff or Defendant on Facebook or other social networking site. Often times, however, an individual’s public posts may not reveal much in regards to an active litigation matter though the individual’s private posts and messages may disclose much more. The question is, how can an attorney ethically gain access to the private information located within an opposing party’s social network site?
It is tempting to have another individual, such as a friend, secretary or paralegal, send a “friend request” to an opposing party in order to gain access to the information that is not made public on their Facebook page. To do so, however, would violate a number of the Pennsylvania Rules of Professional Conduct, including, but not limited to, Rule 5.3 (Responsibilities Regarding Nonlawyer Assistants) and 8.4 (Misconduct).
Rather, there are a few non-binding cases out there that suggest that private information from an individual’s social network site may be obtained through discovery requests. One case in particular comes from Jefferson County, Pennsylvania and illustrates what may be Pennsylvania’s emerging view toward discovery and social networking sites. In McMillen v. Hummingbird Speedway, the Plaintiff claimed that he was injured when the Defendant rear-ended him during a cool down lap after a stock race.
After the Plaintiff posted information on the public portion of his Facebook and MySpace accounts which indicated that he may not actually be injured, the Defendant requested Plaintiff’s usernames and passwords to his social network accounts in Interrogatories. The Plaintiff objected to this request and the Defendant filed a Motion to Compel. The Court granted Defendant’s Motion and ordered the Plaintiff to produce his usernames and passwords to his Facebook and MySpace accounts to Defendant’s counsel, only (the Defendant, himself, was not permitted access to the accounts). The Court further ordered that the Plaintiff was prohibited from taking steps to alter or delete existing information or posts from his Facebook and MySpace accounts.
The Court stated: “Under Pennsylvania’s broad discovery rules, as long as it is relevant to the litigation, whether directly or peripherally, a party may obtain discovery regarding any unprivileged matter. Pa.R.C.P. 4003.1.” McMillen v. Hummingbird Speedway, 2010 Pa.Dist. & Cnty. Dec. LEXIS 270, 2. “In this case, the Plaintiff asked the Court to recognize communications shared among his private friends on social network computer sites as confidential and privileged and thus protected against disclosure.” Id, at 3.The Court noted that Pennsylvania law does not favor evidentiary privileges “for they are in derogation of the search for the truth.” Id, (quoting) Hutchison v. Luddy, 414 Pa. Super. 138, 606 A.2d 905, 908-09 (Pa. Super. 1992) (quoting) Herbert v. Lando, 441 U.S. 153, 175, 99 S. Ct. 1635, 60 L. Ed. 2d 115 (1979).
The Court also pointed to the terms and privacy policies of both Facebook and MySpace stating that they “clearly express the possibility of disclosure” barring the Plaintiff from successfully maintaining that the element of confidentiality protects his Facebook and MySpace accounts from discovery. Id at 10.
The Court went on to state “whatever relational harm may be realized by social network computer site users is undoubtedly outweighed by the benefit of correctly disposing of litigation.” Id, at 11.
The fact that the Plaintiff first posted public information that was relevant to the matter and, therefore, suggested that additional relevant information may be located in the private sections of his Facebook and MySpace pages was clearly taken into account. Had he not made the public posts, I believe that the Court may have ruled differently.
Although this case is not binding, it may be an indication of what is to come from Pennsylvania Courts with respect to social networking sites and litigation. Will Pennsylvania adopt a narrow interpretation of confidentiality? Only time and additional ill-advised posts from plaintiffs and defendants will tell.

by Scott Schuster, Esq.

Many of you are familiar with preferences actions and the defenses to those actions. You may not be aware of fraudulent transfer actions. With the increasing rise in bankruptcy cases in which the main secured creditor is “under water,” bankrupt debtors and trustees are using preference actions as a primary means for collecting funds to distribute to unsecured creditors. However, since unsecured creditors are increasingly aware of preference defenses and how to properly deal with questionable debtors, preference actions are becoming less profitable for the bankruptcy estate. As a result, we’re seeing an increase in the use of fraudulent transfer actions to recover funds for the estate.

There are two types of fraudulent transfer actions: actual fraud (the Debtor deliberately defrauds creditors) an constructive fraud (discussed below). Since actual fraud is somewhat rare, this article is focused on constructively fraudulent transfers.

A transfer is constructively fraudulent if: (1) the debtor received less than reasonably equivalent value in exchange for the transfer and (2) the debtor was (a) insolvent on the date of the transfer or became insolvent as a result of the transfer, (b) the debtor was engaged or was about to engage in a business or transaction for which any property remaining with the debtor was an unreasonably small capital, or (c) the debtor intended to incur or believed that it would incur debts beyond the debtor’s ability to pay as such debts matured.

Most of the cases relating to fraudulent transfers focus on the “reasonably equivalent value” language of the statute. Generally speaking, the courts look to (1) whether the value transferred by the Debtor is approximately equal to the value of what was received by the Debtor in exchange for the transfer and (2) whether the transaction took place at an arm’s length.

In a typical scenario, a vendor provides goods or services having a certain value and the Debtor makes payment sometime thereafter. In this situation, no fraudulent transfer has occurred because the Debtor received “reasonably equivalent value” for its payment.

However, imagine the following scenario: A construction company is composed of three affiliates. Company A cuts timber and delivers it to Company B. Company B processes the timber and makes plywood and delivers it to Company C. Company C uses the plywood to make kitchen cabinets. While these three companies share some common owners, they conduct business at arms-length, do not have any parent-subsidiary relationships and are, for all intents and purposes, separate and distinct legal entities.

Now imagine the creditor that provides $100,000 worth of monthly shipping services for Company A. This creditor is “bankruptcy savvy” and, therefore, insists on 30 day payment terms and strict adherence to payments made in the “ordinary course of business.” All three companies file for chapter 11 bankruptcy protection. When the creditor receives notice of Company A’s bankruptcy, the creditor is secure in knowing that any potential preference action would top out at $300,000 (three months worth of payments) and knows that it has strong defenses to such an action.

Months later, the creditor receives a complaint from the Trustee in Company C’s Bankruptcy demanding the return of $2.4 million worth of “fraudulent transfers.” The complaint indicates that for many years all three companies were insolvent and had problems balancing cash flow. Due to these problems, Company C would pay some of Company A’s Accounts Payable. Pursuant to this arrangement, Company C paid all of the creditors invoices that were directed to Company A. The trustee claims that when Company C paid the monthly invoices for Company A, Company C received no value whatsoever, since the services were delivered to Company A. The trustee therefore demands the return of 2 years worth of monthly payments paid by Company C. Upon review of its file, the creditor is shocked to notice that the checks it received on its invoices were from Company C and not Company A.

Sounds ridiculous, right? Well, while there are certain fact intensive exceptions, such transactions are generally considered “fraudulent transfers” that are recoverable by a bankruptcy trustee.

A creditor that unknowingly receives such a fraudulent transfer is in a very unfortunate situation. While preferences only occur during the 90 days preceding the preference action, the bankruptcy code’s “look back” period for fraudulent transfers is 2 years (which can actually increase depending on which state’s laws apply). Consequently, creditors are at risk of much larger lawsuits being filed to recover fraudulent transfers than the typical preference actions, making it very hard to limit a creditors’ exposure.

More importantly, preference defenses – i.e. ordinary course of business, new value, contemporaneous exchange – do not apply to fraudulent transfers. The fraudulent transfer defenses – typically that the payor received reasonably equivalent value and/or that the payor was insolvent at the time it made the payment – are heavily fact intensive. In other words, the litigation is time consuming and expensive.

For legal and tax purposes, most large companies are split into multiple affiliates, meaning the risks posted by fraudulent transfer actions to unknowing creditors are quite large. For those “bankruptcy savvy” creditors that I mentioned, the best way to protect against such an action is to demand payment from the debtor to which you supplied services. While accepting payment from an affiliate is often the easiest way to get paid timely, it may ultimately end up costing you substantially down the road.

by Scott Schuster, Esq.

It is now common to see individuals file 2, 3, even 4 personal bankruptcies. As the economy continues to stagnate, we are beginning to see multiple filers more often. Creditors should be on alert.

One of the primary reasons for the US bankruptcy system is to give debtors a “fresh start.” The theory is that a debtor weighed down by mountains of debt will have no rational motivation to work hard and contribute to society because any accumulated wealth will just be taken by his/her creditors. A bankruptcy discharge allows such a debtor the ability to avoid those debts and get on with his/her life. If such a discharge were not available, thousands of American citizens would have no reason to contribute to society and, therefore, become a burden to the rest of the country.

However, an individual debtor may file bankruptcy and receive a discharge of all of his/her debts once every seven years. In addition to being able to “burn” their creditors more than once, multiple filers pose even greater threats. Most first-time filers are unaware of how bankruptcy works (i.e. what can and cannot be discharged, how long the process takes, etc.). On the other hand, multiple filers know what debts can be readily discharged and are better able to “game” the system.

As a result, second (or third, or fourth . . .) time filers often prepare for bankruptcy years in advance by rebuilding their credit, obtaining credit and increasing their debts gradually, with no real intention to repay those debts. This is fraud, plain and simple. As a result, creditors should be on alert for second-time filers.

If you believe that one of your debtors has committee fraud, you should contact a bankruptcy attorney about the “nondischargeability” provisions in the bankruptcy code that may be available to you. The Bankruptcy Code sets forth an extensive list of debts that are nondischargeable. Unfortunately, nondischargeability is not automatic – a creditor that holds such a debt must file a complaint with the Bankruptcy Court seeking to have the debt declared nondischargeable. A nondischargeability complaint must usually be filed within about sixty (60) to ninety (90) days after the debtor files his or her bankruptcy petition. 

by Shawn P. McClure, Esq.