BANKRUPTCY AND CREDITOR'S RIGHTS
L A W B R I E F
CLERMONT JACKSONVILLE KEY WEST LAKELAND MELBOURNE NAPLES ORLANDO TALLAHASSEE TAMPA
FALL 2004 www.gray-robinson.com
GSP AND GRAYROBINSON: A WINNING COMBINATION
GSP Marketing Technologies, Inc. has successfully emerged from a Chapter 11reorganization that has enabled the $18,000,000 printing company torestructure its debts while refocusing management on new opportunitiesahead. With the firms bankruptcy and creditors rights department asdebtors counsel, the entire reorganization process began and ended in only126 days. Final corporate documents and secured debt restructuredocuments were executed with an effective date of August 30, 2004. Thecompanys founder and CEO, Paul Neuhoff, characterized the undertaking asa complete success.
GSP distributes signage to thousands of convenience store locations forAmericas largest convenience store chains. The Neuhoff familys reputation for expertise andcompetitive pricing in this niche market has long been recognized. Paul Neuhoff has formulated acomputerized database system that apprises convenience store customers of various signage restrictionsbased upon zip code. GSP will continue to utilize Neuhoffs database and marketing savvy as itprepares to take advantage of new opportunities on the horizon.
The decision for GSP to enter bankruptcy court was not easy. With approximately 150 employeesworking from its Clearwater and Springville offices, GSPs management team was concerned about thepotential impact on GSPs 28 year reputation for excellence. However, macro economic trends in theprinting industry and a confrontational lending relationship ultimately combined to leave GSP no otherreasonable alternative. For many reasons, I wish now that we had considered and implemented theChapter 11 option earlier, Neuhoff now says. Instead of liquidating the company on fire sale terms,GSP is able to continue under a feasible plan that will return a significant distribution to creditors.
During the weeks preceding GSPs bankruptcy filing, the firms team worked with GSPs managementto explore the full range of options. Our group iscomprised of a unique combination of professionalsskilled not only in bankruptcy but also in complimentaryareas of the law that dovetail at the point of insolvency,said John Anthony, the departments statewide chair. Inthe end, I am pleased that GSP could consider all optionsthat we offer so that management would be comfortablewith the Chapter 11 alternative.
Each year, hundreds of mid-sized businesses seekChapter 11 protection throughout Florida. GSP is asuccess story in terms of the business and legal resultsachieved, and the minimal time required to reach finality.Although the majority of the teams efforts are focused onthe representation of financial institutions and othercreditors in Chapter 11 and related proceedings, wecontinue to represent some corporate Chapter 11 debtorsseeking to successfully preserve their businesses andrestructure debt.
IN THIS ISSUE
GSP AND GRAYROBINSON: AWINNING COMBINATION
ELEVENTH CIRCUIT: CHAPTER7 DEBTORS CONCEALING TORTCLAIMS FROM CREDITORS WILLLOSE THOSE CLAIMS
U.S. SUPREME COURT PROVIDESINSIGHT FOR COURTS APPLYINGCRAM DOWN PROVISIONS OFBANKRUPTCY CODE
WHAT WE DO: DIVERSE SKILLSFOR CLIENTS WITH VARYINGNEEDS
BANKRUPTCY AND CREDITOR'S RIGHTS L A W B R I E F
For more informationconcerning these projects or projects in your area,please contact one of ourattorneys below.
John A. Anthonyjanthony@gray-robinson.com 813-273-5066
Stephenie M. Biernackisbiernacki@gray-robinson.com813-273-5033
Jason Burnett firstname.lastname@example.org
Kenneth B. Jacobs email@example.com
Scott R. Lillyslilly@gray-robinson.com813-273-5083
Donald A. Nohrrdnohrr@gray-robinson.com 321-727-8100
Scott W. Spradleyscspradley@gray-robinson.com407-843-8880
Maureen A. Vituccimvitucci@gray-robinson.com 407-843-8880
When a business or individual experiences insolvency, the consequences are far reaching. For this reason, skilled bankruptcyattorneys must understand how other areas of the law might impact strategy for a client dealing with an insolvent business orindividual. We are currently involved in hundreds of bankruptcy cases and state court actions on behalf of financial institutions.However, we feel that our true strength lies in our ability to attend to the full range of client needs when bankruptcy or insolvencyarises. We also work closely with other attorneys in the firm to ensure the best possible result for the client. The following aresome of the primary areas that we find we can offer unique assistance to our clientele.
Loan Enforcement: We get results for lenders state wide. We have represented many of our client financial institutions for morethan a decade. Of approximately $285,000 spent in legal services by one of our larger institutional clients during the 12 months ending August 31, 2004, more than 90% percent of fees and costs were ultimately collected from the defaulting borrowers.
Debt Restructure: Insolvency contexts often require loan modification transactions to be completed on an expedited basis inorder to maximize the lender clients ability to expand the available pool of collateral, and to avoid the consequences of certainbankruptcy law that will sometimes retroactively undo workouts. Our team appreciates the need for prompt, skillful servicewhen a borrower is at the point of insolvency.
Lender Liability: We have successfully defended financial institutions and other businesses from lender liability litigation,including class action litigation, usury claims, and truth in lending claims, in both state and federal courts. Our team has alsosuccessfully prosecuted multi-million dollar usury and other lender liability claims. These experiences enable us to betterrepresent both lenders and borrowers, not only in the courtroom but also in the boardroom while analyzing legal rights andbusiness options.
Complex Litigation: Bankruptcy is not only an area of specialization within the practice of law: bankruptcy is also a forumuniquely suited to resolve many complex business disputes in a fast, efficient, and fair manner. Disputes pertaining to corporategovernance, misappropriation of business assets, landlord-tenant disputes, insurance coverage, and other forms of sophisticatedlitigation can often be resolved most rapidly in bankruptcy court. While our litigators are experienced in all fora in the State ofFlorida, we have litigated complex disputes in every Florida division of the United States Bankruptcy Court, as well as manybankruptcy courts throughout the country.
Sophisticated Collection Activities: Sometimes, obtaining a money judgment is the easiest part of litigation for a creditor. Ourteam has collected many millions of dollars using Floridas full range of collection remedies. In particular, we have experiencein successfully utilizing Floridas enactment of the Uniform Fraudulent Transfer Act in state, federal, and bankruptcy courts.
Defense Against Estate Claims: Sometimes bankruptcy debtors or fiduciaries for debtors bring claims under bankruptcy lawsagainst third parties in order to accumulate assets for distribution to creditors. Preference claims are asserted by debtors ortrustees against creditors who legitimately received payments shortly before bankruptcy. Our team successfully represents scoresof creditors in preference litigation every year. We also defend other business clients against similar estate claims.
Representation Of Fiduciaries: We represent fiduciaries in the full range of state and federal contexts. At any time, ourteammates may represent a state court receiver, assignee for benefit of creditors, Chapter 7 trustee, Chapter 11 trustee orexaminer, post-confirmation disbursing agent, or other fiduciary. We develop insights from these representations that arebeneficial for all of our clients.
Acquisitions: Willing buyers often find willing sellers in the halls of the United States Bankruptcy Court. During the past year,we have represented or counseled with numerous purchasers and prospective purchasers of various assets owned by businessentities involved in insolvency proceedings.
Estate Planning: The firms estate planning expertise and insolvency expertise combine to provide estate planning services in arange of contexts. Additionally, our team is experienced in the representation of litigants in estate planning litigation andlitigation involving family-owned business entities.
We provide the full range of services for sophisticated clients impacted by insolvency issues. Our clients are not required to visitmultiple firms to obtain sound advice regarding inter-related insolvency issues. We would be pleased to speak with you to learnhow we might serve you.
WHAT WE DO: DIVERSE SKILLS FOR CLIENTS WITH VARYING NEEDS
CLERMONT JACKSONVILLE KEY WEST LAKELAND MELBOURNE NAPLES ORLANDO TALLAHASSEE TAMPA
CLERMONT JACKSONVILLE KEY WEST LAKELAND MELBOURNE NAPLES ORLANDO TALLAHASSEE TAMPACLERMONT JACKSONVILLE KEY WEST LAKELAND MELBOURNE NAPLES ORLANDO TALLAHASSEE TAMPA
BANKRUPTCY AND CREDITOR'S RIGHTS L A W B R I E F BANKRUPTCY AND CREDITOR'S RIGHTS L A W B R I E F
For three straight years, the Eleventh Circuit has applied the doctrine of judicial estoppel to precludeindividual Chapter 7 debtors from pursuing pre-petition causes of action that they concealed in theirbankruptcy filings. Debtors failing to disclose causes of action and even pending litigation onbankruptcy schedules, executed under oath, sometimes hope to exploit the bankruptcy process todischarge their debts, and then recover the benefits of a tort claim or other cause of action withoutpaying their creditors. But the Eleventh Circuit has clearly established that because pre-petition causesof action are property of the estate, debtors who conceal these claims from the Chapter 7 trustee andcreditors are precluded from bringing them. The consequences are far reaching.
Under the doctrine of judicial estoppel, a party is bound by his judicial declarations and may notcontradict them in subsequent proceedings involving the same parties and legal issues. The doctrine
prevents the abuse of the judicial process by prohibiting parties from deliberately changing theirpositions solely for advantage. Because a party may not assert a claim that is inconsistent with the claim the party has assertedin a prior proceeding, it logically follows that a tort claimant asserting a pre-petition claim against defendants in a state courtaction must have listed it as a valuable asset in the Chapter 7 case. If not, it would seem that either (a) the debtor did notconsider the claim to have value, or (b) the debtor purposely concealed the valuable cause of action for personal benefit. Eitherway, as an asset, it cannot be administered by the debtor for person lucre.
The first Eleventh Circuit case to apply the doctrine of judicial estoppel is Burnes v. Pemco Aeroplex, Inc., 291 F. 3d 1282 (11thCir. 2002). The Burnes debtor concealed a discrimination suit on his bankruptcy schedules, and amended schedules as his caseconverted from Chapter 13 to Chapter 7. The district court granted the employers motion for summary judgment. TheEleventh Circuit affirmed the same with respect to the debtors monetary claims against the employer, but reversed andremanded the same to the district court so that the debtor could pursue his claims for injunctive relief. The Eleventh Circuitinferred intentional manipulation because the debtor had knowledge of the claims against his employer, and a clear financialmotive to conceal the claim from creditors. Id. at 1287-1288. The Burnes court gave short shrift to the debtors unsupportablecontention that the doctrine did not apply. Rejecting arguments that (a) the omissions were inadvertent; (b) the employer wasnot a party to the bankruptcy case; and (c) the employer was not prejudiced by the debtors omission, the Eleventh Circuitarticulated the principle that judicial estoppel would be applied where needed to protect the integrity of the system. Id. at 1286.On this same basis, the Burnes court rejected the debtors request to reopen the bankruptcy case to allow amendment of hisbankruptcy schedules. This, of course, would foster a principal of full disclosure of assets only when caught.
The Eleventh Circuit adopted an even harsher stance against dishonest or seriously forgetful debtors in Barger v. City ofCartersville, 348 F. 3d 1289 (11th Cir. 2003). In Barger, the debtor also had an employment discrimination suit pending whenshe filed her Chapter 7 case. Although she failed to disclose the suit on her bankruptcy schedules and statement of financialaffairs, the Barger debtor did make some effort to mention the suit to her attorney and the Chapter 7 trustee. Regardless, thecourt found that she too could only pursue her claim for injunctive relief to prospectively limit the employers allegeddiscriminatory misconduct, not as to monetary relief.
In both Burnes and Barger, the integrity of the judicial system was of paramount concern. If the claims at issue were bogus,the apparent dishonesty of the debtor in the bankruptcy process lost neither the debtor or its creditors any recovery. And,presumably, the debtors approach to the bankruptcy process sheds some light on the merits of the claims themselves. But thisis not necessarily so, because even a dishonest debtor can have a meritorious claim. Further, when such a claim is not pursuedfor the benefit of creditors, creditors suffer. With this in mind, the Eleventh Circuit took up the issue again this year in Parkerv. Wendys International, Inc., 365 F. 3d 1268 (11th Cir. 2004). Expanding the logic of its prior rulings, the court concludedthat the judicial estoppel defense of a tort defendant does not preclude a Chapter 7 trustee from bringing a cause of action thatwas concealed in the debtors bankruptcy filings. The court reasoned that the undisclosed cause of action is actually propertyof the bankruptcy estate, not the debtor. Id. at 1272. Reasoning that the trustee is the true party to such litigation, the courteffectively substituted the trustee in place of the debtor, free of the trouble created by debtor non-disclosure. With the trustee
ELEVENTH CIRCUIT: CHAPTER 7 DEBTORS CONCEALING TORTCLAIMS FROM CREDITORS WILL LOSE THOSE CLAIMS
believing that the cause of action could benefit creditors, the apparent dishonesty of the debtor could not be viewed in avacuum. The trustee as a new party was not bound by the doctrine of judicial estoppel.
The question of who holds a tort claim or similar cause of action arising pre-petition in favor of the debtor arises often. Honestdebtors who are victims of pre-petition torts may be able to fund Chapter 7 distributions or Chapter 13 cases with theirrecoveries, keeping excess recoveries for themselves. Other contract and tort claims can also be property of the estateavailable to fund payments to creditors in various contexts. With the Eleventh Circuit having clarified many issues ofdisclosure, and the consequences of non-disclosure, creditors and debtors alike are better able to understand the consequencesof breaking the rules.
On May 17, 2004, the United States Supreme Court issued its opinion in Till v. SCS Credit Corp., 126 S. Ct. 1951 (2004), whichtook up the issue of cram down in a case involving Chapter 13 debtors and a secured creditor objecting to confirmation of aChapter 13 plan. The case involved the cram down provisions of Bankruptcy Code 1325(a)(5)(B)(ii), in the context of aChapter 13 case; however, the cram down provisions of Bankruptcy Code 1129 are closely analogous. Accordingly, theconsequences of the tiny dispute in Till could be significant for business entities seeking to confirm Chapter 11 plans.Confronting a tangle of prior case law, the Till opinion provides guidance for debtors as well as creditors, but no conclusiveanswer as to what interest rate applies in a contested confirmation context involving objecting secured creditors.
Till involved a purchase money lenders claim on the debtors truck, purchased one year before a Chapter 13 filing for $6,400.The debtors proposed a plan seeking to repay $4,000 of $4,900 outstanding on the truck loan over a two year period, at 9.5%,rather than the contract rate of 21%. Applying cram down provisions very similar to those set forth in Chapter 11, thebankruptcy court confirmed the plan over the finance companys objections. The appellate record in the district court andbefore the Seventh Circuit focused on the presumptive rate for purposes of cram down. The Supreme Court thereforegranted certiorari to address this unsettled issue.
In his opinion for the Court, Justice Stevens wrote for a four-judge plurality. He concluded that the national prime rate,adjusted to compensate for a greater risk of non-payment, should be applied in determining whether the Chapter 13 plan in Tillcould be crammed down on the finance company. The Court therefore reversed the district court and Seventh Circuitopinions, and remanded to the bankruptcy court. Tills plan most likely falls within the formulaic approach established by theCourt, in that the national prime rate of interest at the time in question was 8%, and the Till plan provided an interest rate1.5% higher than prime to reflect additional risk. Significantly, Justice Thomass concurring opinion contemplates a differingformula still, meaning that the analysis applied by Justice Stevens is not adopted by the majority of the Court. Moreover, thefour dissenting justices contended that there should be a rebuttable presumption favoring the contract rate of interest. Inthe Till case, and many Chapter 11 cases, such a holding would be tantamount to a death knell.
In bankruptcy law, opinions like Till can have far reaching implications. For years, the law has been unsettled regarding theapplicable interest rate that a bankruptcy court should apply in Chapter 11 or Chapter 13 to secured debt in contestedconfirmation hearings. Bankruptcy Code 1129 requires that treatment for a secured claim be fair and equitable if thedebtor is to confirm over the objection of a secured creditor. Debtors counsel in large cases and small will hail Till as providinga reasonable framework for evaluating interest rates for secured creditors. In fact, Justice Stevenss opinion remarked thatcourts applying cram down standards in these contexts are to select a rate high enough to compensate the creditor for itsrisk, but not so high as to doom the plan. Id. at 1962. Creditors, however, will point to the fact that the Till analysis isprecarious precedent: Even if adopted by the majority, the Stevens opinion provides only gossamer insight regarding howbankruptcy courts should adjust the national prime rate to address risk. But the case has already been cited by numerouscourts since its publication, and every practitioner would be well advised to consider it carefully in crafting or opposing confirmation.
U.S. SUPREME COURT PROVIDES INSIGHT FOR COURTS APPLYINGCRAM DOWN PROVISIONS OF BANKRUPTCY CODE John Anthony
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