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September 27, 2008

Law School in Kentucky Files Bankruptcy Petition

American Justice Law School filed a chapter 7 petition in the Western District of Kentucky last week.  I'm not sure why.  The schedules, attached here, disclose that the "unencumbered" assets were sold early this year to a new group now operating "the Barkley Law School."  There doesn't seem to be any equity in the assets remaining and corporations do not receive a discharge in chapter ever - ever - ever.  The trustee will look to see if there is anything to sell and if not, simply close the case and the corporation will be back to where it was.  The trustee might sue the Board of Directors for breach of fiduciary duties or other sins but that doesn't often happen unless there is cash around which can be used to pay the trustee's attorneys.

There a couple of reasons why the corporation might have filed the chapter 7.  One is that the new entity might want to buy some of the remaining assets and have the sale approved by the Bankruptcy Court.  Secondly, the new school may want to disclose the previous transfer of the assets to it and if no one objects, they will have a great argument later that no games were played in the transfer.  Next, the schedules were signed by a Lisa Owen, entitled "Sole Director."  Apparently everyone quit and told her to turn out the lights.  She may need someone to give the keys to.  There are payroll taxes so maybe she thinks there are assets which can be sold and the IRS would be first in line if there is anything left after the trustee pays herself and her attorneys.  Lastly, the bankruptcy may have been filed hoping that creditors do not know that the bankruptcy doesn't affect their rights (it only delays enforcement of their rights), and when they see the bankruptcy notice, they write off the debt and go away.       

September 27, 2008 in Current Affairs | Permalink | Comments (0) | TrackBack

September 26, 2008

Bankruptcy 2005 Applied to Wall Street

From my friend Peter Lively.  This is pretty good.  Thinking outside the box as they say.

Bankruptcy 2005 applied to Wall Street

In 2005 our congress passed a bankruptcy bill, crafted by the banking industry, to correct supposed problems with the then current law. Despite testimony from a wide range of experts ranging from bankruptcy judges and trustees to Harvard professors that the new bill imposed onerous conditions on people in dire circumstances and lead to many more families suffering financial ruin, our representative chose to believe their banker buddies and passed this turkey. After all, only a scumbag scofflaw would attempt to get out of their financial obligations, right?

The current crisis got me to thinking, what would happen if we imposed the same conditions on the bankers as they imposed on us in 2005? Would it look something like this?

  1. Banks would be required to show their tax returns for the past five years and all their financial statements. These would be gone over with a fine tooth comb and any irregularities promptly reported to the IRS. Income would be averaged for this five year period and arguments that they had no income to pay would be ignored. They made a lot of money over a five year period, so who cares if they say that they have no income or no assets?
  1. Lawyers hired to represent them in the hearings would have to sign a statement testifying that all the paperwork was accurate and true and that they agreed to be legally and financially responsible if it was not or if any errors were discovered. Ever.
  1. All officers and employees of the corporation would have their income and assets surveyed. If their house was deemed "too expensive" they would be required to sell it and move into a very modest apartment. They would be required to sell all their cars but one, and if it was anything above a Ford Taurus or equivalent, or if the payment was too high, they would be expected to get a clunker and drive that. There would be no allowance for maintenance or repair of their auto, as that would be taking money away from their creditors.
  1. All income of the corporation, its officers and employees would be the property of the trustee, with only an allowance for meager living expenses allowed. All other income would be sent to the creditors on a quarterly basis. Income tax returns would be given to trustee every year to make sure no one took a second job or received an inheritance. If the return showed extra income, this would be seized by the trustee. If the money was already spent, the judge would throw them out of bankruptcy protection.
  1. All officers and employees of the corporation would be subject to daily calls from the collection agencies that purchased debts from their creditors for pennies on the dollar. Too bad the law was changed to allow this, because the old law banning this sort of activity was" too restrictive" on the freedom of commerce. Hope they have fun talking with all those fun folks in India threatening their families with jail.
  1. And of course, lawyers get paid first.

I'm not trying to criticize the current effort going on in Congress. I just thought it would be funny if the bankers had  a taste of their own medicine.

You can access this posting here. 

September 26, 2008 in Current Affairs | Permalink | Comments (0) | TrackBack

September 25, 2008

Circuit Court of Appeals Cases for Last Week

1st Circuit Court of Appeals, September 17, 2008
In Re Weaver, --- F.3d ---, 2008 WL ------ (1st Cir. 2008)(court of appeals exercised its discretion under section 158(d)(2)(A) to deny leave to appeal)

1st Circuit Court of Appeals, September 19, 2008
Richmond v. New Hampshire Supreme Court Comm. On Prof'l Conduct, --- F.3d ---, 2008 WL ------ (1st Cir. 2008)(order to pay costs of bringing disciplinary proceedings not discharged in Chapter 7 bankruptcy where award of costs was discretionary and was a penalty within 11 U.S.C. section 523(a)(7))

Thanks again to Findlaw.com.

September 25, 2008 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

September 24, 2008

Response to Mortgage Banker's Association's Position re Modifying Mortgages in Bankruptcy

This has got Georgetown Prof. Adam Levitin's feathers a little ruffled.  The Mortgage Bankers Assn claims that if home mortgages can be modified in a bankruptcy case, over the objection of the lender, interest rates will rise and there will be fewer loans.  Here is his "very short explanation of why the MBA's claim is patently false and in fact disprovable."  Thanks to his Credit Slips posting.

What's this flap all about Alfie?  A secured lender's claim can be modified in a chapter 13 or chapter 11.  This means the loan can be reduced to the value of the property and the interest rate can be reduced to "a reasonable rate."  Right now - today - chapter 11 and chapter 13 debtors can re-write the secured loan UNLESS the loan is secured by the debtor's home (or most newly acquired vehicles).  If the debtor could propose a plan which would re-write the loan on his home, the lender would suddenly find reason to talk to the debtor and work this out.  When the lender will not talk, the debtor simply walks away and the lender gets the home back in a foreclosure sale - at its then current value obviously - and re-sells it (for which it then re-lends the funds at the then current interest rate).  What am I missing here? 

September 24, 2008 in Current Affairs | Permalink | Comments (0) | TrackBack

September 22, 2008

Federal Bailout Bill

Here is the text for the draft bailout proposal by Congress (with some ads - sorry about that).  The Treasury Secretary can buy up to $700 Billion in "mortgage related assets" for the next two years.  He has to report to Congress within three months "with respect to the authorities exercised under this act." 

Oh, and by the way, the statutory limit on borrowing is increased to $11.3 trillion. 

September 22, 2008 in Legislation | Permalink | Comments (1) | TrackBack

September 21, 2008

Supreme Court Rules that Defalcation by a Fiduciary Requires an Express Trust - in 1844

John_mclean Chapman v. Forsyth & Limerick, 43 U.S. 202 (1844)

Issue:  When a person sells goods for the account of the owner and thereafter does not pay the owner, is the debt discharged under the bankruptcy laws at the time?       

Holding:  Yes, the concept of defalcation by a fiduciary requires an express trust.       
 
Justice John McLean
The debtor filed a voluntary bankruptcy petition under the 1844 bankruptcy law and received a discharge.  The law at the time provided,
“’all persons whatsoever . . . , owing debts which shall not have been created in consequence of a defalcation as a public officer, or as executor, administrator, guardian, or trustee, or while acting in any other fiduciary capacity,' shall, on a compliance with the requisites of the bankrupt law, be entitled to a discharge under it.”

Later the debtor was sued by a creditor who alleged he should not have received a discharge at all because “he was indebted in a fiduciary capacity.”  The debtor had sold “150 bales of cotton” owned by the creditor on behalf of and for the account of the creditor.  The issue was whether or not this section applied to this debtor at all; whether, if it did, he was entitled to a discharge at all; and whether the creditor could attack the discharge after it was entered.

The Supreme Court ruled that if this section applied to the debtor, he would still receive a discharge of his other debts.  “The debts here specified are excepted from the operation of the act.  This exception applies to the debts and not to the person, if he owe other debts.”  The Supreme Court reached that conclusion by reading “the fourth section” of the act which provided “’that no person who after the passage of the act shall apply trust-funds to his own use,’ shall be discharged.”  The court said that “from this provision the strongest implication arises, that if the fiduciary debts were contracted before the passing of the act, the petitioner would, for other obligations, be entitled to a discharge.”

As to whether the debt was non-dischargeable, the court said, “The second point is, whether a factor, who retains the money of his principal, is a fiduciary debtor within the act.”  The court said, “’the defalcation of a public officer,' 'executor,' 'administrator,' 'guardian,' or 'trustee,' are not cases of implied but special trusts, and the 'other fiduciary capacity' mentioned, must mean the same class of trusts.  The act speaks of technical trusts, and not those which the law implies from the contract.  A factor is not, therefore, within the act.”

“This view is strengthened and, indeed, made conclusive by the provision of the fourth section, which declares that no 'merchant, banker, factor, broker, underwriter, or marine insurer,' shall be entitled to a discharge, 'who has not kept proper books of accounts.'  [Therefore] a factor who owes his principal money received on the sale of his goods, is not a fiduciary debtor within the meaning of the act.”

As to the last issue, the Supreme Court said that a creditor who was given notice of the bankruptcy and received a dividend and did not object to the discharge is estopped from arguing later that the debt was not discharged.  “As a creditor, he has a right to come into the bankrupt court and claim his dividend.  He does not establish his claim as a fiduciary one, but as a debt 'provable within the statute.'  And having done this, he can never controvert the discharge.”  If the creditor did not “come into the bankrupt court, prove his debt, &c., he is not bound by the discharge, but may sue for and recover his debt from the discharged bankrupt, by showing that it was within one of the exceptions of the first section.”

Notes:
1. Justice John McLean was appointed to the Supreme Court by President Andrew Jackson in 1830.  He wrote a fierce and lengthy dissent in the Dred Scott case in 1857, four years before his death in 1861.
2. This case arises under the Bankruptcy Act of 1841 which was repealed about a year after it was enacted.  Justice McLean acknowledged this saying, “These questions are far less important than they would have been had the bankrupt law not been repealed.  But they are still important as affecting a large class of citizens and to a large amount.”

September 21, 2008 in Supreme Court | Permalink | Comments (0) | TrackBack