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In a case of first impression, Judge Montali had to decide whether a landlord’s claim for payment of rent during the gap period of an involuntary bankruptcy is entitled to priority.
Before delving into the facts of the case, a quick primer is appropriate. The treatment of a commercial landlord’s claims in bankruptcy is too complicated and will be discussed in more depth in a future article so this “quick primer” is very limited.
When a company files for bankruptcy, the landlord in a nonresidential context is usually the most powerful player in the scene. The landlord is entitled to be paid contract rate lease payments until the Debtor decides to either reject or assume the lease. This is provided for under § 365(d)(3) which states that “The trustee shall timely perform all the obligations of the debtor … arising from and after the order for relief under any unexpired lease of nonresidential real property … until such lease is assumed or rejected, notwithstanding section 503 (b)(1) of this title….” Read more…
The facts of the situation are not in dispute. The Debtor in a Chapter 11 case needed to hire a forensic accountant. The Debtor applied for permission to hire the accountant under § 327(a) of the Bankruptcy Code. The employment application did not contain any special provisions but the engagement letter contained the following clause:
In the event we are requested or authorized by Debtor or are required by government regulation, subpoena, court order, or other legal process to produce our documents or our personnel as witnesses with respect to our engagements for Debtor, Debtor will, so long as we are not a party to the proceeding in which the information is sought, reimburse us for our professional time and expenses, as well as the fees and expenses of our counsel, incurred in responding to such requests.
No objection to employment was filed and the Court entered an order approving the application. Read more…
In this case, the sole shareholder, director and president of a company (all the same Individual) transferred about $8,000,000 into a secret bank account which he then used to pay personal debts. The question before the Court was whether the transfers to the bank account made the Individual, in his personal capacity, an initial transferee within the meaning of § 550.
The surprising answer (although not stated in this way) is that it depends on whether the secret bank account was opened in the name of the company or individual. In this case, the secret account was completely under the dominion and control of the Individual; the Individual’s wife was a signatory on the account and the only purpose it served was to pay personal expenses. None of that mattered. The account was opened under the company’s name. The District Court held that the Individual was not an initial transferee since the account was a company account.
UCC-1 financing statements are effective for five years. Before the five years has run, the creditor must renew the financing statement by filing what’s called a continuation statement. This is essentially a UCC-1 with a check next to the box labeled “continuation statement.” The only caveat is any continuation statement must be filed no sooner than six months before the five year period has expired. Assuming a continuation statement is filed, the five year period is expanded by five years from when the original would have expired. This can be done indefinitely.
What if the Debtor filed bankruptcy?
Before joining his firm, I visited Professor Hayes’ Bankruptcy class which he teaches at the University of West Los Angeles. The topic of the day was “claims.” As we parsed through the case law, I gave the students a hint, if there is any question whether something is a claim, it’s a claim! In fact, I couldn’t think of something that wasn’t a claim! Read more…
There is a great website at www.nationalmortgagesettlement.com where you can find the original complaint filed by the feds and most of the states against a bunch of large banks and servicing companies. The website also has an executive summary of the settlements and copies of the actual settlement agreements. The complaint sure pulls no punches accusing banks of doing all sorts of fraudulent things and accusing them of doing these things on purpose. I hope there is not a whole new round of people who stop paying their mortgages so they can qualify for these new programs.
We had a great cdcbaa meeting on Saturday. Jeff Shinbrot and Judge Mitchell Goldberg (Ret.) discussed dischargeability litigation. Jeff regaled us with his five rules of litigation.