COVID-19 Bankruptcy Relief Extension Act of 2021

The “COVID-19 Bankruptcy Relief Extension Act of 2021” was signed into law by President Biden on March 27, 2021.  Among other provisions, the debt limit under subchapter V of the Small Business Reorganization Act has been increased from $2,725,625 to $7.5 million for another year, until March 27, 2022. Subchapter V provides for a streamlined chapter 11 reorganization for qualified small businesses.  More information about Subchapter V is available here:

Mediation Services

Danning, Gill, Israel & Krasnoff, LLP offers mediation services for business disputes in state and federal court.  Danning Gill attorneys Eric Israel, and George Schulman, are trained mediators.  The firm’s extensive experience in financial disputes informs our understanding of the innerworkings of businesses in a range of legal and real world contexts.  As mediators, we apply our knowledge of the law, creativity, open-mindedness, and spirit of service, to help parties efficiently and effectively reach consensual resolutions.

 

Eric P. Israel

Eric P. Israel

Eric has extensive experience representing individual and business debtors, landlords, court-appointed receivers, and bankruptcy trustees, with regard to insolvencies and business bankruptcy, and state and federal receiverships, including bankruptcy litigation and appeals.  He has handled reorganizations for numerous construction companies.  Eric is also a certified mediator through the Straus Institute for Dispute Resolution. He has served on the panel of mediators for the bankruptcy courts in the Central District of California since the panel’s inception in 1998.  For mediation inquiries, please contact [email] or call (310) 277-0077)

 

 


George E. Schulman

George E. Schulman, Partner

For 49 years, George has been litigating cases in both civil and criminal court, often relating to insolvent or troubled businesses. He crafts cost-effective strategies to maximize recoveries or minimize loss. Those cases have involved very complicated fact patterns and administrative challenges.  Prior to entering private practice, George served as a government attorney at the Federal Trade Commission (FTC), principally trying cases concerning antitrust violations, vocational school fraud, land fraud, and truth-in-lending violations.  George was appointed a special prosecutor three times to prosecute criminal violations of federal court orders obtained by the FTC.  George has been a Temporary Judge of the Los Angeles County Superior Court since 1987.  George completed his mediation training at the Los Angeles County Bar Association Center for Civic Mediation.

 


ILC publishes write-up by Danning Gill Summer Associate, Isabelle Cho on In re Love, 649 B.R. 556 (Bankr. E.D. Cal. 2023)

The following is a case update written by Isabelle Cho, Summer Associate at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent case of interest, In re Love, 649 B.R. 556, 560 (Bankr. E.D. Cal. 2023).

A bankruptcy court for the Eastern District of California, Hon. Christopher M. Klein, held that the student loan liability of a Chapter 7 debtor is discharged after satisfying, by the requisite preponderance of evidence standard, all three elements of the Brunner-Pena test for establishing undue hardship. The Court also analyzed the differing approaches of the Ninth and Second Circuits in interpreting the test. Importantly, the Court cited the Supreme Court case U.S. Bank Nat’l Ass’n v. Village at Lakeridge, 138 S. Ct. 960 (2018), to highlight that the division of roles between trial and appellate courts depend on the nature of the “mixed question” of law and fact. Applying the principles of Lakeridge, the Court determined that since evaluating undue hardship related to student loan debt involves a fact-based inquiry, appellate courts should apply a “clear error” standard instead of a de novo review. In re Love, 649 B.R. 556 (Bankr. E.D. Cal. 2023).

Here’s a link to the writeup on the CLA website:  click here.

To read the full published decision click here.

Aaron E. de Leest Recognized by the California Lawyers Association

Aaron de Leest, Attorney at LawThe California Lawyers Association has recognized Danning Gill’s Senior Counsel, Aaron E. de Leest, in the Member Spotlight for his achievements as a Business Law Section member.  Aaron is the current Co-Chair of the BLS Insolvency Law Committee and a past chair of the Publications Subcommittee for the ILC.  Congratulations to Aaron!

To read the full article, click here.

What is a “bona fide dispute”?

Two provisions of the Bankruptcy Code turn on the existence of a “bona fide dispute.”  An involuntary petition may not be filed by an alleged creditor against the alleged debtor if the creditor’s claim is “the subject of a bona fide dispute as to liability or amount.”  11 U.S.C. § 303(b)(1).  A trustee may sell property free and clear of an interest that is “in bona fide dispute.”  11 U.S.C. § 363(f)(4).  These disparate statutory provisions share a unique phrase.

What is a “bona fide dispute”?  Two recent court decisions address this question.

Consistent with canons of statutory construction,[1] the definition of the term “bona fide dispute” is the same in both section 303, where it is one of the requirements for a creditor to be eligible to file an involuntary bankruptcy petition, and section 363, where it is one of the five circumstances in which a trustee (or debtor in possession) may sell assets free and clear of liabilities. The majority of courts have adopted the “objective standard” which “requires the bankruptcy court to ‘determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt.’”[2]

In a recent decision, the U.S. Bankruptcy Court for the Middle District of Pennsylvania, examined the standing of creditors to file an involuntary bankruptcy petition against an alleged debtor.[3]  Chief Bankruptcy Judge Henry W. Van Eck analyzed whether the petitioning creditors’ claims were the subject of a “bona fide dispute” under applicable Third Circuit precedent.  Under such precedent, a petitioning creditor’s claim “is the subject of a bona fide dispute if ‘there is a genuine issue of a material fact that bears upon the debtor’s liability, or a meritorious contention as to the application of law to undisputed facts.’”[4]  Applying this standard, the court evaluated each of the petitioning creditors’ claims.  The court noted a number of evidentiary deficiencies in the alleged claims, particularly insufficient evidence establishing the validity of the claims or rebutting the alleged debtor’s defenses.  Thus, a number of the petitioning creditors’ claims were disqualified.  However, since the court declined to find bad faith, additional creditors were not disqualified from joining in the petition, and the court set further proceedings to determine whether including joining creditors in the petition would satisfy the requirements for an involuntary petition.

In another recent decision, the U.S. District Court for the Central District of California addressed whether the bankruptcy court erred when it approved a sale of property over the objections of a secured creditor.[5]  The appellant creditor had obtained a state court judgment against the debtor appellee, who was the creditor’s former business partner.  The debtor filed for chapter 11 protection after the creditor recorded abstracts of judgments encumbering the debtor’s properties.  The case was later converted to chapter 7.  The chapter 7 trustee sold a parcel of real property of the debtor.  The bankruptcy court authorized the trustee’s sale free and clear of the creditor’s liens on the basis that those interests were the subjects of a “bona fide dispute” within the meaning of section 363(f)(4) of the Bankruptcy Code.  On appeal to the District Court, the creditor challenged the bankruptcy court’s determination that there was a bona fide dispute.  The creditor argued that the interests were not the subject of a bona fide dispute because the bankruptcy court had previously ruled that the creditors’ liens were not avoided.  In that earlier adversary proceeding the bankruptcy court had entered summary judgment in favor of the debtor ruling that the liens were subject to mandatory subordination under section 510(b), although the liens were not avoided.[6]   The creditor appealed that decision, and that prior appeal was still pending while the sale motion was before the bankruptcy court.[7]  District Court Judge Dolly M. Gee ruled that a dispute as to the priority of an interest is a bona fide dispute within the meaning of section 363(f)(4).[8]  Ultimately, the court found the bankruptcy court’s ruling “consistent with the purpose of section 363(f)(4), which seeks to prevent the delay of liquidation of the estate’s assets while disputes regarding interests in the estate are litigated.”[9]

While these two cases involve very different facts and requests for relief, the meaning of “bona fide dispute” appears to be consistent, and courts should be able to rely on the standard established in precedent when addressing a “bona fide dispute,” whether under section 303 or 363 of the Bankruptcy Code.

[1] Law v. Siegel, 571 U.S. 415, 422, 134 S. Ct. 1188, 1195, 188 L. Ed. 2d 146 (2014) (It is a “normal rule of statutory construction” that words repeated in different parts of the same statute generally have the same meaning.”) (internal quotations omitted).

[2] See In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1064 (9th Cir. 2002) (quoting In re Busick, 831 F.2d 745, 750 (7th Cir. 1987)), which discussed the standard in the involuntary petition context under section 303.  See also the following cases citing Vortex or Busick in the context of sales of estate property under section 363: In re Gaylord Grain L.L.C., 306 B.R. 624, 627 (B.A.P. 8th Cir. 2004) (citing Busick); In re Figueroa Mountain Brewing, LLC, No. 9:20-BK-11208-MB, 2021 WL 2787880, at *8 (Bankr. C.D. Cal. July 2, 2021) (citing Vortex); In re Southcreek Dev., LLC, No. 10-CV-2136, 2010 WL 4683607, at *3 (C.D. Ill. Oct. 25, 2010) (citing Vortex and Busick); In re Lexington Healthcare Grp., Inc., 363 B.R. 713, 716 (Bankr. D. Del. 2007) (citing Busick).

[3] In re Deluxe Bldg. Sols., LLC, No. 5:21-BK-00534-HWV, 2022 WL 16543189, at *4 (Bankr. M.D. Pa. Oct. 28, 2022)

[4] Id.

[5] In re Elieff, No. SA CV 21-1720-DMG, 2022 WL 4484597 (C.D. Cal. Sept. 26, 2022).

[6] Id at *6 (discussing In re Elieff, 637 B.R. 612 (B.A.P. 9th Cir. 2022)).

[7] Id. at *2.

[8] Id. (citing: In re Daufuskie Island Props., LLC, 431 B.R. 626, 646 (Bankr. D.S.C. 2010); In re Farina, 9 B.R. 726, 729 (Bankr. D. Me. 1981); In re TWL Corp., No. 08-42773-BTR-11, 2008 WL 5246069, at *5 (Bankr. E.D. Tex. Dec. 15, 2008); Salerno, et al., Is a Lien Priority Dispute a Bona Fide Dispute?, Advanced Chapter 11 Bankr. Practice § 7.109 (2022)).

[9] Id. (citing In re Clark, 266 B.R. 163, 171 (B.A.P. 9th Cir. 2001)).

John N. Tedford, IV honored as the Century City Bar Association’s Corporate Bankruptcy Lawyer of the Year

Danning Gill congratulates our partner John N. Tedford, IV, on his recognition as the Century City Bar Association’s Corporate Bankruptcy Lawyer of the Year.  John and other award recipients were honored on November 10 at the CCBA’s 54th Annual Installation Banquet and Awards Ceremony.  Joining John and his wife Mary at the awards ceremony were the Hon. Alan M. Ahart, DG cofounder David Gill, present and former DG partners, associates, staff and friends.

 

 

Second Circuit Analyzes Concealment of a Debtor’s Beneficial Interest in Assets in the Name of Another Under Section 727(a)(2)(A): Gasson v. Premier Capital, LLC, 43 F.4th 37 (2d Cir. 2022)

By Shantal Malmed

Brief Summary

A creditor obtained judgment against the chapter 7 debtor for denial of the debtor’s discharge under 11 U.S.C. § 727.  On the first appeal, the district court affirmed.  On further appeal to the Second Circuit, the debtor challenged the court’s determinations that he had an interest in in an entity, that he concealed that interest with an intent to hinder creditors, and that the concealment occurred within the one-year statutory period.  The Second Circuit also affirmed.

Factual Background

In the mid-1990s, the chapter 7 debtor, a CPA and financial consultant, was a part owner of several financially challenged manufacturing businesses.  The debtor personally guaranteed the debts of those businesses.  Creditors obtained judgments against the debtor on account of his guaranties. While these financial struggles were ongoing, in 2001, the debtor and his wife formed Soroban, Inc., a consulting business.  The debtor’s wife was listed as the sole owner and chair of the board of Soroban.

However, the debtor took on a larger role than the ownership structure suggested.  The debtor ran Soroban’s day-to-day operations, managed the movement of funds between Soroban’s bank accounts, signed promissory notes on Soroban’s behalf, and controlled the company’s finances. The debtor was also Soroban’s sole employee.  The debtor’s wife hardly had any involvement with the business of Soroban.

In 2011, Premier Capital, LLC acquired the judgments against the debtor and began pursuing collection.  In 2012, the debtor filed for chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York.  Premier commenced an adversary proceeding against the debtor seeking denial of his discharge pursuant to 11 U.S.C. § 727(a).  The central argument in Premier’s complaint was that the debtor violated section 727(a), specifically subsection 727(a)(2)(A) which states that “(a) [t]he court shall grant the debtor a discharge, unless . . . (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—(A) property of the debtor, within one year before the date of the filing of the petition” (emphasis added).

In considering the question of whether the debtor concealed his interest in Soroban in violation of 11 U.S.C. section 727(a)(2)(B), the trial court applied the test established by the bankruptcy court in In re Carl, 517 B.R. 53 (Bankr. N.D.N.Y. 2014).  In Carl, the court considered the following five factors to determine whether a debtor had an equitable interest in a company and concealed that interest in an effort to hinder the claims of their creditors:

1. Whether the debtor previously owned a similar business;

2. Whether the debtor left his or her previous business venture under financial duress;

3. Whether the debtor transferred his or her salary, or the right to receive a salary to a family member or to a business entity owned by an insider;

4. Whether the debtor is actively and actually involved in the success of the insider business; and

5. Whether the debtor retains some of the benefits of the salary, such as having expenses paid for by the insider or the business.

Based on its application of the Carl test, the bankruptcy court found that the debtor had an equitable interest in Soroban.  The district court affirmed.

The Second Circuit’s Analysis

On appeal to the Second Circuit, the debtor argued that the Carl test is not binding precedent.  The Second Circuit agreed that Carl was not binding.  Further, the appellate court observed that the Carl decision does not recognize that state law determines a debtor’s property interest in an asset.  Accordingly, the appellate court analyzed New York state law on how to establish whether a party has a property interest in an asset.

The court looked at the New York Court of Appeals decision of Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 33 N.Y.3d 389, 104 N.Y.S.3d 26, 128 N.E.3d 153 (2019).  The Carothers court did not endorse a particular list of factors, but, affirmed the trial court because it “satisfactorily directed the jury to the ultimate inquiry of control over a professional corporation.”  The trial court had considered the following factors:

1. Whether the purported owners’ dealings with the business were designed to give [them] substantial control over the business and channel profits to themselves;

2. Whether they exercised dominion and control over business assets, including bank accounts;

3. The extent to which business funds were used for personal rather than corporate purposes;

4. Whether they were responsible for hiring, firing, and payment of salaries for the employees;

5. Whether the day-to-day formalities of corporate existence were followed;

6. Whether the business shared common office space and employees with other companies owned by the purported owners; and

7. Whether other parties played a substantial role in the day-to-day and overall operation and management of the business.

While the bankruptcy court’s application of the Carl test did not match the factors in Carothers, per se, the court concluded that, consistent with New York law as demonstrated in Carothers, the bankruptcy court did properly address the “‘ultimate inquiry of control over a professional corporation’ [and] whether the debtor ‘exhibited the attributes of ownership’ in the context of bankruptcy proceedings.”  Thus, it was not an error for the bankruptcy court to consider the Carl factors.

Moreover, under the theory of “continuous concealment” the debtor was not able to escape liability by arguing that the concealment did not occur during the one-year lookback period of section 727(a)(2)(A).  The concealment was ongoing during the year prior to bankruptcy, even if the original act of creating the hidden ownership interest occurred years earlier.

Author’s Comments

The Gasson decision is logical and equitable.  The debtor’s sole operation and control of a new entity, despite his wife’s “paper” status as owner, revealed the truth that the debtor was the equitable interest holder.  The debtor’s technical argument that the trial court’s equitable interest test was not binding precedent did not prevent the Court of Appeals from reaching its own conclusion of law consistent with the bankruptcy court’s holding.

This is also an important reminder that the one-year lookback period for concealment of assets under section 727(a)(2)(A) does not shield a debtor who intentionally concealed assets years earlier and continues to intentionally benefit from that concealment during the one-year lookback period.  As noted in footnote 2 of the decision, at least seven circuits (including the Ninth Circuit) have applied a version of the “continuous concealment” doctrine, and none have rejected it.  It’s fair to say that there is no safe jurisdiction for intentional asset concealment, and the passing of time will not shield a witting concealer from liability under section 727.

Results May be a Relevant Factor to Awards of Bankruptcy Professional Compensation, Says Sixth Circuit in In re Village Apothecary, Inc.

By Uzzi O. Raanan

When deciding what is “reasonable compensation” to award to bankruptcy professionals, including trustees and their counsel, can courts consider the ultimate “results obtained” by the professionals as one of the lodestar factors, even though this factor is not specifically included among the factors enumerated in 11 U.S.C. § 330(a)(3)?  The Sixth Circuit Court of Appeals recently answered this question in the affirmative.  See In re Village Apothecary, Inc., 2022 WL 3365131 (2022).  To read the full opinion, click here.

In Village Apothecary, the debtor’s chapter 7 trustee retained special counsel (the “Firm”) to investigate and pursue potential legal claims worth at least $1,655,962.  After a year-long investigation, the Firm identified possible claims against the debtor’s former president.  The Firm drafted a complaint but ultimately determined that the claims would be unsuccessful.  The trustee agreed to settle the claims for $38,000.  This brought the estate’s total assets to $40,710.87.  The Firm filed a fee application under 11 U.S.C. § 330, asking for a little over $37,000, representing 90.6% of the estate’s total assets.

The bankruptcy court approved only half of the requested fees.  It relied on various lodestar factors, balancing the “amount in controversy” with the “results obtained” by counsel, concluding that the level of success was minimal because it resulted in no distribution to the non-administrative creditors.

On appeal, the district court affirmed, disagreeing with the Firm’s argument that “results obtained” could no longer be used as a lodestar factor under section 330(a)(3).

On appeal of the district court’s decision, the Sixth Circuit Court of Appeals affirmed again.  The Sixth Circuit started out by explaining how professional fees are handled under the Bankruptcy Code.  Under section 330(a), courts “may” award to professionals “reasonable compensation” for actual and necessary services.  The question raised in this appeal was how do courts decide what is “reasonable compensation.”

Prior to 1994, section 330 required courts to consider the time, nature, extent, and value of the services as well as the costs of “comparable services.”  Seeking further guidance, courts crafted ways to define “reasonable compensation.”  One approach adopted by the Fifth Circuit utilized 12 factors, known as the “Johnson Factors,” that relied on Title VII to analyze reasonableness.  Another approach, adopted by the Sixth Circuit, required bankruptcy courts to first calculate a “lodestar amount” by multiplying a professional’s reasonable hourly rate by the number of hours reasonably worked.  Once this amount was derived, courts could exercise their discretion by also applying the Johnson Factors.  One of the factors was the “amount involved and the results obtained.”

In 1994, Congress amended section 330, codifying some but not all of the Johnson Factors.  Section 330(a)(3) now instructs courts to consider, “the nature, the extent, and the value of such services, taking into account all relevant factors, including” many Johnson Factors.  (Emphasis added.)  The list does not include “results obtained.”  The court noted that it has never considered whether the 1994 amendment precludes courts from considering other Johnson Factors, like the “results obtained,” that were not codified into the statute.

Using statutory interpretation canons, the court concluded that by including the modifier, “all relevant factors, including,” Congress did not intend to limit courts to the specific factors codified in section 330(a)(3).  Rather, courts may also consider factors not expressly enumerated in the statute.  The court was also influenced by the fact that professional fees under section 330(a)(1) are discretionary, stating that courts “may” but are not required to award such fees.  This discretion suggests that Congress intended the list of factors in section 330(a)(3) to be illustrative, but not exclusive.

The Sixth Circuit ultimately concluded that the bankruptcy court did not abuse its discretion by reducing the Firm’s fees by half.

 

Announcement of Confirmation of Jaguar Distribution Corp.’s Chapter 11 Plan of Liquidation

Danning, Gill, Israel & Krasnoff, LLP (“Danning Gill”), is proud to have represented Jaguar Distribution Corp. (“Jaguar”) in its chapter 11 case, in which Jaguar successfully sold substantially all of its assets and confirmed a chapter 11 plan of liquidation.  Jaguar’s plan went effective on July 15, 2022.

Jaguar distributed independent and international films and television programs to airlines and cruise ship companies.  As an early innovator in the field, Jaguar succeeded in bringing independent and international films to domestic and foreign airline audiences.  For a variety of reasons, including the increased availability of streaming and download services such as Netflix and Amazon, and the proliferation of “minimum guarantees” that distribution companies often pay for the right to distribute films and television shows, Jaguar experienced a significant decline in revenues.

Jaguar retained Danning Gill as insolvency counsel in early 2019.  Around the same time, Jaguar also retained James Wong of Armory Consulting Company as Chief Restructuring Officer.  Danning Gill and Mr. Wong worked together to explore Jaguar’s options, including reorganization or liquidation under chapter 11 of the Bankruptcy Code.

Danning Gill filed Jaguar’s chapter 11 petition on July 31, 2020.  A few days later, Danning Gill filed Jaguar’s motion for approval of sale procedures in connection with a proposed sale of substantially all of Jaguar’s assets to Ricochet Digital Media, LLC (“Ricochet”).  In October 2020, after an auction, the Bankruptcy Court approved Jaguar’s sale of substantially all of its assets to Ricochet for $30,000 plus a percentage of receivables and future revenues collected by Ricochet.  The sale closed on November 2, 2020.

In February 2022, Danning Gill filed Jaguar’s chapter 11 plan of liquidation.  Under the plan, which was confirmed in June 2022, Jaguar’s remaining assets were assigned to a liquidating trust to be administered for the benefit of Jaguar’s creditors.  Jaguar’s plan went effective on July 15, 2022.  A few weeks later, the trustee of the liquidating trust filed three lawsuits to try to generate additional funds to pay holders of allowed claims.

Jaguar’s case is In re Jaguar Distribution Corp.  It was filed in the U.S. Bankruptcy Court for the Central District of California, Case No. 1:20-bk-11358-MB, and assigned to the Honorable Martin Barash.  John Tedford and Aaron de Leest of Danning Gill served as Jaguar’s general bankruptcy counsel.  James Wong of Armory Consulting Co. served as Jaguar’s Chief Restructuring Officer.  The official committee of unsecured creditors was represented by Victor Sahn and Steve Burnell of SulmeyerKupetz, now of Greenspoon Marder, LLP.  The trustee of the liquidating trust established by Jaguar’s plan is Elissa Miller of Greenspoon Marder, LLP.