On August 24, 2015, Judge Lee, a Bankruptcy Judge in the Eastern District of California, disqualified the Estate’s general bankruptcy counsel even though counsel was properly employed under § 327(a). The Court found that counsel was a disinterested person within the meaning of the code and did not hold or represent an interest adverse to the estate. This is a wild (but proper) result because under California law, a client’s waiver or consent can cure these types of deficiencies and under Bankruptcy law, those defects cannot be cured!
So how is it that under Bankruptcy law, counsel was properly employed but had to be disqualified under California law?
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…
I have spoken with quite a few practitioners and surprisingly, all of them have said the same thing: an individual Debtor in Chapter 11 Bankruptcy can only receive a discharge once every 8 years.
Then a good friend of mine and told me about his magic bullet: he would vacate the prior discharge to make his clients eligible for the Chapter 11 discharge. It is quite brilliant actually but it turns out not to be necessary.
First, let’s discuss the code section which seems to have caused all the confusion:
Before people worry too much, this is not as bad as it sounds but it is still pretty awful.
Under Bankruptcy Code section 102, “notice and hearing” is a due process safeguard: “after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances.” In other words, there are circumstances where notice and hearing means just notice or notice and an opportunity to object. Hopefully local bankruptcy rules are modified to make these notice only requests.
My wife wanted to go shopping at the Burbank Mall yesterday. I told her to have fun but that did not work.
After we worked up an appetite, we headed to the food court. While she ordered food, I headed over to Hot Dogs on a Stick. There was a moderate line, good. I was given a free hush puppy to try and when I inquired about their ice drinks, I was given a nice size sample. Delicious.
What can I say? Ted Olsen, partner at Gibson, Dunn & Crutcher, known for his part in the Bush v. Gore fiasco in 2000, and for his part in the Perry – same sex marriage case in California – and Prop 8 – is billing $1,800 per hour for his part in a chapter 11 case. As Jacqueline Palank writes in the WSJ Bankruptcy Blog:
Bankruptcy attorneys, as we’ve noted, also belong to the exclusive but growing $1,000-or-more club, although their presence is somewhat more controversial given the distressed companies they’re representing. Bankruptcy tends to be where we encounter top-dollar fees—like Theodore Olson’s stunning $1,800 hourly rate in the LightSquared Chapter 11 case—because they’re subject to a federal judge’s approval and therefore are easily visible in publicly filed court papers.
According to the same article, there are now some 700 or so partners who bill $1,000 per hour or more in bankruptcy cases.
I found out the hard way that corporate fraud is discharged in chapter 11 (provided of course that a plan is confirmed that is not a liquidating plan). I say the hard way because I advised Judge Wayne Johnson recently that I was going to file a non-dischargeability complaint in the corporate chapter 11 and he said something like, “you can’t do that,” and I responded something like, “Oh yes I can.” He then read me sections 523 and 1141 and I backed off and promised to review the code before filing anything. The issue came up last week when someone posted the same question on a listserve and Prof. Mark Scarberry from Pepperdine responded explaining the reasoning behind the rule.
Section 523(a) applies, by its terms, only to debtors who are individuals (flesh-and-blood human beings). Section 523(a) refers to section 1141 and thus applies to chapter 11 discharges of individuals. Section 1141(d)(2) confirms that result by providing that the chapter 11 discharge does not discharge an individual debtor from debts that are excepted from the discharge by section 523.
Section 727 applies only in chapter 7 cases. See section 103(b). (Note that the exceptions from discharge in section 523(a) are irrelevant in a chapter 7 case where the debtor is not an individual, because section 727(a)(1) prevents any such non-individual debtor from receiving a chapter 7 discharge.)
Here is my best understanding of the policy behind the non-applicability of section 523(a) to non-individual chapter 11 cases.
I promised the folks who attended the Nuts & Bolts Program at UWLA yesterday that I would post my article on the Section 1111(b) election. The Section 1111 fin
On Thursday, March 22nd, from 12 noon until 1:15 p.m., the San Fernando Valley Bar Association will be putting on what I believe is a highly needed program, especially for bankruptcy attorneys new to chapter 11 practice or who are considering trying their hands at chapter 11.
As attorneys, we learn the law and how to apply it. Chapter 11 is foremost not the practice of law; it is the practice of understanding. Understanding people, e.g., the client or the client’s principal, understanding why they have failed and what we can do to help create success out of failure, understanding the creditors and seeing what we can do to bring them on board for the reorganization, and giving understanding the bankruptcy judge who will have reason to support the debtor too.
The attorney needs to set the rhythms of a case but the rhythms do not come from the law. The things we learn in law school really do not help us in chapter 11. What we learn in other areas of bankruptcy practice do not help us much in chapter 11 either. We set the rhythms, we make a difference and we help our clients succeed by understanding business, understanding people and, of course, understanding the law.