Chapter 11 v Chapter 13 - Part 3

This is the next part in this series.  There will be at least a part 4, because I didn't get all I wanted to into this.  In this part, Joe Sixpack has decided (or been talked into) to filing for Chapter 11.  Before, I get to this, I must say I have been very appreciative of the positive feedback I have gotten on this and I welcome any further commentary positive or negative.  However on to the merits....

Here is Joe Sixpack's factual scenario again -

The Debtor Joe Sixpack has $90,000 in unsecured debt.  His non gerrymandered form 22C gives him projected disposable income of $500 per month.  He has a car payment of $300 per month for the next 36 months.  He also has a 401k loan of $200 per month that ends in 24 months.  Further, his non gerrymandered and properly re-allocated schedules I and J show a positive $600.  The Chapter 13 trustee's vig is estimated to be 5.0%..  One detail I forgot in my previous hypo was, we will assume that Joe's quarterly disbursements will require him to pay a United States Trustee fee of $675 every quarter.

So Joe files for Chapter 11.  When he retains his brilliant attorney , he is fortunate that his Chapter 11 counsel is ridiculously cheap (or stupid) and only requires $5,000 up front plus the Chapter 11 filing of $1,246.  Joe hims and haws and talks about some guy on a billboard heading east bound on the 10 says he will do a bankruptcy for $399, but our brilliant attorney does a masterful sales pitch, and Joe digs up the cash and pays up.  Joe's attorney agrees to charge him $300 an hour and with standard cost reimbursements.

The case is filed.  In Chapter 11, once a case is filed we have to do what are known as "7-day package" for the United States Trustee.  This sounds a bit daunting, but it really isn't substantially different than the documents one would submit for a similar Chapter 13.  One of the matters which is different from 13 to 11 is the Debtor (or really Debtor-in-possession) has to close out existing bank accounts on the day of filing and open what are called Debtor-in-possession accounts or for short, DIP accounts.  I won't go into all the ins and outs of this, but this while being a pain in the ass, is not all that complicated.  I suggest US Bank for this, they are easy to deal with and it is on the UST approved list.

While Joe is doing his bank account work, brilliant attorney ("BA" after this) has some work to do.  He needs to get employed, so he will file an employment application.  This is not rocket science, but it needs to get done, if BA wants to get paid.  This motion is normally done on negative notice and you won't see any objections unless you have some screwy terms, or you are on the UST shit list.  Try to stay off that.  Also, some judges are pretty particular and make you follow the local rules to a "T", others rubber stamp absent objection.  I suggest drafting a template that conforms to the local rules.

Often you and Joe will be required to attend an "initial debtor interview" or IDI.  This is usually a couple weeks or so after you file the case, and is best described as a 341a pre-game show.  The UST analyst makes sure your 7-day is in, and basically briefs you and the debtor on how things work in Chapter 11.

After this approximately 3 weeks later, you have the 341a hearing with either the UST analyst or staff attorney.  This is like your standard Chapter 13 341a where ids are checked and the schedules are verified for completeness and there is some discussion about what the goal of the case is.  This usually takes about 15 minutes and then you are on your merry way.

While this is going on, the Debtor has to file his monthly operating reports.  Some debtors are good at this, some are not.  A monthly operating report is really a spreadsheet that shows money in, money out and shows whether the debtor is going positive in cash flow (good) or negative in cash flow (bad).

Usually at some point somewhat after the 341a, there will be a status conference.  BA will have to file a status report.  The point of the conference is to ensure compliance with UST regulations and set some dates.  The dates to be set are usually -  claims bar date, deadline to file plan / disclosure statement, and sometimes deadline to object to claims.  Some judges will waive your appearance if you get your status report in on time and you are current on operating reports and other requirements.

So about now, we are about two months deep into our case.  Notice that no one has asked about why you pay $1200 a month for your daughters figure skating lessons (real expense from a chapter 7 of mine....) or asked about step ups or inquired about your plan payment status or asked about mortgage payments or threatened dismissals with a bar or presented you with 42 page manifesto on Chapter 11 procedure in a particular judge's court or referenced poorly reasoned cases like the BAP decision about 401k payments in Chapter 13s. 

There is a reason for this and that is because ACCORDING TO 11 USC 1112(b)(2) A MOTION TO DISMISS OR CONVERT REQUIRES NOTICE AND A HEARING AND IT IS ACTUALLY ENFORCED.  It is really amazing.  Attorneys have to do stuff like file motions supported by real law and evidence, and amazingly oral assertions are not taken as gospel.  Perhaps even most amazing, is for once BA gets to feel like a real attorney, where issues are actually decided on the law and not quizzical objections.  It is really easy to sit behind a desk and rattle off objections on case after case, but when an attorney actually has to draft a motion, support it with evidence, come to a hearing that has been properly noticed, and respond to the other party's opposition, it makes flimsy motions to dismiss really not worth the time and effort unless you have legitimate grounds.

That concludes Part 3.  Part 4 will get to the disclosure statement and hopefully confirmation, then I hope part 5 will be the cost-benefit analysis and I think there will be a Part 6 trying to wrap it all up.

 

Chapter 11 v. Chapter 13 Part 2

For part two on Chapter 11 v Chapter 13, I am going to dispose of lengthy discussions about exclusivity period, 1111(b) elections, disclosure statement hearings and absolute priority rules.  Instead, I'm going to do this law school style with a hypo.  This post will be about the Chapter 13 side to the hypo

So here are the facts:

The Debtor Joe Sixpack has $90,000 in unsecured debt.  His non gerrymandered form 22C gives him projected disposable income of $500 per month.  He has a car payment of $300 per month for the next 36 months.  He also has a 401k loan of $200 per month that ends in 24 months.  Further, his non gerrymandered and properly re-allocated schedules I and J show a positive $600.  The Chapter 13 trustee's vig is estimated to be 5.0%.

So Joe files for Chapter 13.  When he retains his brilliant attorney, he pays him $2,000 and his counsel will receive $2,000 "through the plan".  Joe's plan proposes to pay $600 per month for 60 months.  This will pay his creditors the $30,000 they are required to recieve, his counsel gets his extra $2,000 and trustee gets his vig and there is a little left over.  All documents are in order, Joe brings his properly completed cashiers check to the 341a he is good to go, right?

No he is not.  While not specified in the code or really backed up by reality, the common law of Chapter 13s state "when a periodic obligation that is not treated under the plan is paid off, that amount of payment is disposable income more or less irrefutably".  So Joe would now being staring down a plan that looks something like:

Month 1-24:  $600 per month

Months 25 -36:  $800 per month (401k loan paid off)

Months 37-60:  $1100 (Car paid off)

Plan base is now $50,400.

Joe is good now, right?  He is only 60 months and 50 grand away from being back in the High Life....

Not quite.  The trustee's hands grabbing all that they can, will (usually) take possession of the Joe's tax

refunds.  Let's say Joe's average tax refund is $500 per year, so his outlay is now $55,400 (includes his $2,000 retainer to counsel).  For simplicity sake I am not going to present value this cash flow.

Next up is Chapter 11

Chapter 11 v Chapter 13 - Part I

    I have quasi advocating for sometime that for many if not most individuals who are filing a re-organization bankruptcy would be better served by Chapter 11 as opposed to the conventional wisdom of filing for Chapter 13.  This is a two part post.  The first part talks about some drawbacks of Chapter 13.

Yesterday, I watched the video of the oral argument of Danielson v. Flores in front of the Ninth Circuit sitting en banc.  I could tell the panel was largely uneducated in things Chapter 13.  I realized this when Judge Kozinski asked Elizabeth whether she represented the Debtor.   Not really.

     During the trustee’s oral argument, Judge Kozinski asked counsel multiple times if a Debtor has zero disposable income what is the Debtor is committing to?  And counsel did an excellent job of explaining why a Debtor might do this, owing the IRS, mortgage arrears, and the ubiquitous lien strip.  However, her best argument was what she didn’t say.

      The panel was not told by any party what really happens on the ground in Chapter 13.  The way it works is the Debtor completes form 22C.  If the Debtor is below median, then the “means test” doesn’t apply.  If the Debtor is above median, then form 22C is completed.  If the number is positive, then you multiply 60 times the number and that equals the amount general unsecured creditors must be paid over the life of the plan.  Further, the plan must be 60 months in duration.

      However,  if the Debtor is negative on projected disposable income then technically the Debtor does not have to pay anything to unsecured creditors.  The panel seemed to think that when a debtor was negative on projected disposable income, it would be obvious, unsecured creditors would get paid nothing and that would be that.

       However, while not at issue, the panel was not told what really happens when a negative projected disposable income debtor files for Chapter 13 for whatever reason.  What really happens, is the trustee will proceed to nickel and dime the Debtor on every expense on Schedules I and J.  This is done under the auspices of “good faith”.  Anyone who can run a query on westlaw (or google scholar) would find out that good faith is not defined by some measure of the reasonableness of expenses nor is Directv NFL Package per se unreasonable(if to watch Seahawks very reasonable, to watch 49ers unreasonable)  Rather, it is a combination of many factors of which expenses is just one area.

       The reason the nickel and diming is an effective strategy is that the trustee owns an immense tactical advantage over Debtors for many reasons.  First, Debtor’s counsel are underpaid like no tomorrow.  In order for a Chapter 13 to be profitable for counsel it really needs to be confirmed quickly with few hearings, or cases must be filed in large groups.  Forcing the Debtor’s counsel to attend multiple hearings simply wears down the Debtor counsel. 

       Second, and this is perhaps the trustee’s most potent weapon, is that the trustee can make an oral motion to dismiss at any hearing and on virtually any grounds.  Often these motions are based on technical aspects involving plan payments, mortgage payments, tax returns, credit counseling certificates, and a myriad of local concerns.   Very few Chapter 13s are dismissed on the merits i.e. failure to confirm a plan because of some missing 1325(a) element.

      Third is some judges just don’t like Chapter 13.  I can’t blame them.  The calendars are long and half the 

cases have zero chance of working.  Here is one judge who really doesn’t like Chapter 13s.

There are many more and those are just the three that came to mind.  I am not even going to get into all the 

post-confirmation problems like tax refunds, motions to modify / dismiss and the hurdles of actually getting 

the discharge order in hand. 

       Nor am I going to get into the limitations on bifurcation of secured claims, the 60-month limit (no more, 

no  less) on repayments and general inflexibility.

      The next installment will get to why in fact Chapter 11 is superior in many cases.

      Finally, I am not begrudging or criticizing any trustee or their counsel for doing the above things.  I 

respect the trustee’s business judgment, if they believe doing the above helps them further their 

responsibilities and duties, then I respect that and won’t question it at all.