DEBTOR’S COUNSEL’S FEES

In re Williams, --- B.R. ----, 2007 WL 51188 (6th Cir. B.A.P. 2007). Debtor’s counsel filed an application for an additional $1,083.32 in fees. He previously had received $850.00 in fees from the debtor prior to the filing of the bankruptcy case. The Bankruptcy Court reduced the counsel’s compensation to the pre-BAPCPA presumptive $850.00 “no look” fee and ordered that any amount already paid in excess of that presumptive fee be disgorged.

On appeal to the BAP, the BAP found that the lodestar method, adopted by the Sixth Circuit in Boddy v. United States Bankruptcy Court (In re Boddy), 950 F.2d 334 (6th Cir. 1991), controlled the result of the appeal. The BAP found that the Bankruptcy Court had discussed some of the factors which are subsumed in the lodestar analysis, like the novelty and difficulty of the issues presented to the counsel, however, the Bankruptcy Court had not expressly calculated the lodestar amount by using the Sixth Circuit mandated methodology, making that failure legally erroneous and thereby abusing its discretion.

COMMENT: Now that the BAP has clarified the method by which fees in a Chapter 7 case are to be calculated, all that remains to be clarified is how debtor's counsel is to collect those fees since any fees not collected before filing are deemed discharged according to the Sixth Circuit.

11 U.S.C. §§ 544 and 548 and R.C. § 1336.04 - Fraudulent Transfers
R.C. § 1701.35 - Stock Redemptions

Belfance v. Buonpane (In re Omega Door Company, Inc.), Case No. 03-42905 (Bankr. N.D. Ohio February 1, 2007) (J. Woods). The defendants sold all of the stock of the debtor and its two affiliate companies to buyers for the purchase price of $1,550,000.00. The defendants received $550,000.00 in cash and a promissory note dated January 1, 1999 in the principal amount of $1,000,000.00, executed and delivered by the buyers. To secure payment on the note, the debtor executed and delivered a guaranty on the same date on which the debtor guaranteed repayment of the obligations of the buyers under the note. The $550,000.00 cash payment was financed through two loans incurred by the buyers, which were guaranteed by the debtor. All of the payments on the note were made by checks drawn on the debtor’s bank account. The debtor filed a voluntary petition for relief under Chapter 11 on June 10, 2003.

The trustee asserted that the installment payments made by the debtor on the note during the four years preceding the petition date constituted fraudulent transfers pursuant to 11 U.S.C. § 544(b) and R.C. § 1336.07. Additionally, the trustee argued that the installment payments made by the debtor on the note during the one year preceding the petition date constituted fraudulent transfers pursuant to 11 U.S.C. § 548. The trustee also asserted that the installment payments made by the debtor on the note during the four years preceding the petition date constituted illegal corporate dividends in violation of R.C. §§ 1701.33 and 1701.35. The defendants countered that the trustee’s claims were barred by the statute of limitations because the limitations period began to run on the purchase date rather than on the dates that the respective installment payments were made or, alternatively, they argued that the debtor received reasonably equivalent value for the payments on the note, which was a commensurate reduction in the debtor’s guarantor liability.

Finding no case law addressing the treatment of installment payments under a promissory note under state or federal fraudulent transfer law, the Court found that the installment payments represented an obligation “incurred” by the buyers and the debtor on the purchase date, and thus, the respective statutes of limitations barred the state and federal fraudulent transfer actions.

As to the stock purchase argument, the Court found that first, as a result of the purchase agreement in 1999, the buyers acquired ownership and control of the company, and second, that although the debtor made all the payments on the note, the debtor neither purchased nor redeemed its own stock, thus, the payments made on the note by the debtor, as guarantor of the debt owed by the buyers, were made for the benefit of the buyers.

Even assuming that a stock redemption, rather than a stock sale, had occurred, the Court found that the trustee had not carried her burden of demonstrating that there was no genuine issue of material fact as to whether the defendants “knowingly receive[d] a dividend, distribution, or payment.” Thus, the trustee had failed to show that a stock redemption occurred or that the defendants knowingly sold their shares back to the debtor, and thus, the defendants were entitled to judgment as a matter of law.

COMMENT: This case should be of interest to any debtor who has engaged in a leveraged buyout. There is case law that states that a leveraged buyout could be a fraudulent transfer given the right circumstances, as new management does not constitute reasonably equivalent value for a leveraged buyout. If, however, there are to be payments over time for the leveraged buyout, the Omega Door Company decision’s reasoning would allow such payments to escape scrutiny if the underlying transaction took place over four years prior to the bankruptcy filing. It is also important that there be no stock exchanged with the payments over time. The court's decision has its foundation in the fact that the sale took place over four years prior to filing. If stock is exchanged pursuant to the deal some time after the documents effectuating the leveraged buyout were signed, the subsequent payments might be at risk.

§ 707(b) Motion to Dismiss - Secured Claims and Ownership/Lease Expense

In re Zak, Case No. 06-41241 (Bankr. N.D. Ohio Jan. 12, 2007) (J. Woods). The United States Trustee objected to the debtors’ means test wherein the debtors deducted “future payments on secured claims” for a mortgage on residential real property, which had been foreclosed upon and which the debtors indicated they would be surrendering, and an “ownership/lease expense” for two vehicles, which the debtors owned free and clear.

Like the Simmons court before it (see the summary in the Friday, January 12, 2007 post), the Court found that, even though the secured creditor had obtained a prepetition foreclosure judgment and obtained relief from the stay prior to the time that the United States Trustee’s motion to dismiss was filed (which was distinguishable from the Simmons case), the Court still found that the debtors were contractually liable on the underlying note and that the relief from stay did not effectuate a contractual act to surrender the real estate as would be required to effectuate a “surrender.” Accordingly, the Court found the deduction appropriate.

As for the ownership/lease expense deductions, the Court found that IRS local standards are not used as a cap, but as the actual deduction to which the debtor is entitled. Thus, the Court held that, for purposes of determining the presumption of abuse, the debtors were entitled to take the ownership/lease deductions for their two vehicles, despite the fact that they currently had no car payments, as, in reality, the debtors might soon need to incur a car payment for a vehicle that needed replaced.

Comment: It seems to the author to be problematic for a court to rule that the ownership/lease expense deduction means one thing in a Chapter 7 context and another in a Chapter 13 context. The text of the statute does not differentiate between a Chapter 7 and a Chapter 13 case. Given a court's mandate to apply the plain meaning of a statute, it seems to be reaching to state that the same passage can effectuate two different results when the text does not specify that two results are intended.

Further, this case may leave open the question of whether an ownership/lease expense can be claimed if the debtor does not own a vehicle at all. The reasoning in the Zak case that a debtor may have to incur an ownership/lease expense in the future would apply with equal force to a debtor who owns a vehicle free and clear and a debtor who does not own a vehicle at all.

§ 1325(a)(5) Hanging Paragraph - Interest Applicable to 910 Claim

In re Robinson, Case No. 06-52826 (Bankr. S.D. Ohio Dec. 11, 2006) (J. Preston). The debtor, who purchased a 2005 Honda Civic for personal, family and household use within 910 days before her bankruptcy filing, recognized that the debt owed to the secured creditor was a 910 claim, however, scheduled its claim without interest, payable in equal monthly installments over the life of the plan. The secured creditor objected to confirmation of the debtors’ proposed plan on the basis of the Supreme Court decision in Till v. SCS Credit Corporation, 541 U.S. 465 (2004). The secured creditor argued that this decision mandated the payment of interest to secured creditors at the prime rate of interest plus risk. The debtors argued that the hanging paragraph of § 1325(a) determined that 11 U.S.C. § 506 of the Bankruptcy Code did not apply to claims of the kind described in the hanging paragraph and, therefore, such claims were not “allowed secured claims” and were not entitled to interest pursuant to the provisions of 11 U.S.C. §§ 506 and 1325(a)(5).

The Court framed the issue as to first, what is an “allowed secured claim,” and second, what is the impact of the hanging paragraph on treatment of allowed secured claims as specified by § 1325(a)(5). The Court noted that the term “allowed secured claim” is not defined in the Bankruptcy Code, however, the term “claim” is defined in the Bankruptcy Code as “right to payment, whether . . . secured or unsecured . . . .” Additionally, 11 U.S.C. § 502 addresses allowance of claims, and because there had been no objection to the secured creditor’s claim or to the validity of its security interest or lien, its claim remained an “allowed secured claim” but was protected from the bifurcation procedure allowed by § 506. Thus, the secured claimant was entitled to treatment set forth in § 1325(a)(5).

While the Court found that the hanging paragraph of § 1325 does not “emasculate” the application of § 1325(a)(5)(B), neither the hanging paragraph nor any other provision of BAPCPA dilutes the application of 11 U.S.C. § 1322(b)(2), which allows modification of the rights of holders of secured claims as well as other claimants. Thus, although the debtors could not bifurcate the secured claimant’s claim into secured and unsecured claims, the debtors could modify the interest rate to be paid to the secured claimant, subject to Till. The Court continued the matter to afford the debtors the opportunity to file an amended plan.

COMMENT: Another viewpoint on this issue is typified by the case of In re Wampler, 345 B.R. 730 (Bankr. D. Kan. 2006). This case essentially states that the only way a claim can be an allowed, secured claim is by the application of §§ 502 and 506. Section 502 makes a claim an allowed claim and § 506 defines when a claim is an allowed, secured claim. Without the application of § 506, the claim cannot be an allowed, secured claim, and therefore, § 1325(a)(5) does not apply and no postpetition interest need be provided. Collier advocates for this approach. The Robinson court states that § 506 is not a definitional section and therefore does not control whether a claim is an allowed, secured claim. However, the Supreme Court seems to suggest otherwise. U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239-39 (1989) (“Section 506 . . . governs the definition and treatment of secured claims . . . .”).