Orange County Bankruptcy Attorney

As the name suggests, bankruptcy litigation encompasses disputes arising from, or connected with, a bankruptcy proceeding. Such disputes can involve businesses, individuals, government agencies, or organized groups. The attorneys at Marshack Hays represent clients in all aspects of bankruptcy litigation.

What Are Common Examples of Bankruptcy Litigation?

Common examples of bankruptcy litigation include:

• Preferential transfer lawsuits. When a bankruptcy case is filed, the trustee can recover all payments made by a debtor during the 90-day period leading up to the bankruptcy petition. Creditors have various defenses to these claims, the most common of which include an ordinary course of business defense, a new value defense, and a contemporaneous exchange for value defense.
• Fraudulent transfer lawsuits. A bankruptcy trustee can also recover a transfer made by a debtor during the four years before the bankruptcy case was filed if the transfer was made (i) with the intent to “hinder, delay, or defraud” any creditor or (ii) while the debtor was insolvent and the debtor did not receive reasonably equivalent value for the transfer. Creditors have various defenses to these claims, including good faith and the payment of fair value.
• Dischargeability lawsuits. Typically, a debtor is able to discharge debts through the bankruptcy process. There are, however, circumstances under which a debt cannot be discharged. For example, a debt resulting from fraud cannot be discharged as long as the creditor takes steps to have the bankruptcy court declare the debt to be non-dischargeable.
• Objections to plan. When a debtor is using a plan to reorganize, creditors can object to plan and argue that certain aspects should be changed. Some of the most common objections relate to the plan’s feasibility (the debtor’s ability to make the proposed payments), the amount offered to creditors (whether the debtor is using its “best efforts”), and whether the debtor is unfairly attempting to retain valuable assets without paying creditors in full (the absolute priority rule).
• Cash collateral disputes. After a bankruptcy case is filed, a debtor cannot use cash or cash equivalents that are subject to a lien without a court order authorizing the use. To obtain such an order, the debtor must “adequately protect” the creditor against the risk that the value of the collateral will be diminished by the use.
• Lien-priority disputes. When a debtor offers the same property to multiple creditors as collateral, disputes can arise with respect to the priority of the creditor’s liens. The senior position is the most valuable.
• Lien-stripping disputes. Under certain circumstances, a debtor can force a creditor to remove a lien from the debtor’s property if the property is over-encumbered (the value of the property is less than the value of the creditor’s lien plus senior liens). If a creditor can show that the property is not “under water,” then the lien cannot be stripped away.
• Proof of Claim/Objection to Claim. Creditors are entitled to file a proof of claim against the debtor, explaining the amount and basis for the debt owed. When a proof of claim is properly filed, the underlying debt is presumed to be valid. A proof of claim can be disputed if the challenger presents evidence regarding the validity of the debt. When a proof of claim is challenged, the ultimate burden of persuading the court that a debt is valid is on the claimant.

Although resolution of disagreements without legal action is always preferable, it is not always possible. Resolving disputes involving insolvency is challenging because finite resources mean that some parties will not be fully compensated. It is important to choose skilled attorneys capable of maximizing your recovery and protecting your right.

Chapter 7 of the Bankruptcy Code is generally known as a liquidation proceeding. For individuals, the concept is rather straightforward; in exchange for liquidating all of a debtor’s non-exempt assets, the debtor gets a discharge of all dischargeable debts.

Because California has very liberal (some would say too generous) exemption statutes, over 95% of individual debtors filing Chapter 7 get to keep all of their assets and get a discharge of their dischargeable debts. As stated above, a debtor who files Chapter 7 gets to keep “exempt assets” and must surrender “non-exempt assets.” The exemption statutes in California are very extensive. Some assets are protected in full and other assets are protected up to a dollar amount. For example, certain retirement accounts are fully exempt. On the other hand, equity in a residence is exempt either in the amount of $75,000, $100,000, or $175,000, depending on several factors.

Already, “dischargeable debts” have been referenced several times. In Chapter 7, most debts of are dischargeable, but some are not. The list of non-dischargeable debts can be found in Section 523 of the Bankruptcy Code. Debts that are non-dischargeable include certain types of tax debts, certain types of domestic support obligations, certain debts incurred through fraud or willful malicious behavior, and certain debts that arise from breach of fiduciary duty.

A debtor can also be denied a discharge of all debts for several reasons. The two most common reasons for a denial of discharge are (1) if a debtor makes a false oath, such as not disclosing an asset or a transfer, or (2) if a debtor transfers assets with intent to hinder, delay, or defraud creditors. These are common grounds for denial of discharge, but there are other grounds for denial.

One of the most important jobs of a bankruptcy attorney is to ethically and legally maximize a debtor’s right to claim exemptions. Another important job is to assess the facts and advise the client as to what debts are dischargeable.

Chapter 7 bankruptcy proceedings are complex, and a potential debtor should only retain counsel who has demonstrated expertise in the area.

The above discussion is primarily directed to individuals filing Chapter 7. Business entities are certainly permitted to file Chapter 7, but there are few major differences. One, business entities do not get discharges of their debts under Chapter 7. Two, business entities do not get to exempt any assets.

It is a frequent debate whether it makes any sense for business entity to file Chapter 7 seeing as they do not get discharges. There are pros and cons of filing Chapter 7 and there is no one right answer. It is always determined by the specific facts of each case.

Filing a Chapter 7 generally requires significant planning before filing the petition. Anyone considering filing a Chapter 7 petition should consult with an attorney long before there any significant deadlines.

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Chapter 11 of United States Bankruptcy Code is commonly referred to as “reorganization.”

The Chapter 11 bankruptcy petition can be filed either by a business entity or an individual. Typically, individuals only file Chapter 11 if they do not qualify to file Chapter 13.

Debtors frequently opt for Chapter 11 in lieu of liquidation because the objective in reorganization is to preserve the assets and the going concern and/or business. In exchange, the Court confirms a plan that provides for treatment of the creditor claims.

Chapter 11 statutes are very complex and the summary provided herein is a simple overview.

A Chapter 11 reorganization proceeding commences with the filing of a petition. Upon filing, the debtor is commonly referred to as “debtor-in-possession.” The debtor is responsible for preserving and managing all assets as a fiduciary and is subject to strict guidelines as set forth in the Bankruptcy Code in order to continue to operate the business. The debtor, absent a Court order to the contrary, has an exclusive right, within the first 120 days of filing the petition, to propose a plan of reorganization. Thereafter, any party in interest may file a plan. Contents of plans of reorganization vary significantly depending on the facts of each case.

Typically, a plan in a retail case would provide that the debtor would “reject” leases for stores that are not profitable, and thereafter would propose a plan that is based on the profits derived from the profitable locations.

Typically, a plan in a real estate case would provide that the mortgages would be rewritten within the confines set forth by the Bankruptcy Code, such that the debtor may service the debt under different terms and retain ownership of the property.

Typically, a plan in a manufacturing or operating company would provide that the debtor would have a period of time to restructure its operation and then, as a result of the restructuring, use future profits to pay past debts.

Again, what the plan will say is driven by the unique facts of each case. In some cases, the “reorganization” is really a controlled liquidation of some or all the debtor’s assets. In these instances, often the prevailing view is that a controlled liquidation will result in a greater pay off for creditors than a foreclosure sale or forced liquidation.

It is quite common that a case will include liquidation of some assets and restructuring of debts based on profits derived from the remaining assets.

The Court has the power to appoint a Trustee to oversee the business, if cause is shown as required under the Bankruptcy Code.  If a Trustee is appointed, it will be the Trustee’s responsibility to manage the assets and to make a determination whether to file a plan of reorganization or to liquidate assets.

Before a plan can be confirmed by the Court, the debtor must file both a plan and disclosure statement describing the plan and the debtor’s financial status. If and only if the Court approves the disclosure statement, then the plan will be submitted to creditors for vote. The Bankruptcy Code has mandatory provisions for each plan of reorganization. For example, a plan must designate distinct classes of claims and interest for treatment under the plan of reorganization. Each claim within a class must be similar to the other claims in that class. For example, a first lienholder’s claim would be in a separate class from a junior lienholders’ claim. Further, general unsecured claims would be classified separately from secured claims.

In order to confirm a plan, a class of claimants has to accept the plan. A class is deemed to accept if the plan is accepted by creditors that hold at least two-thirds in amount and more than half in number of allowed claims in the class.

If there are impaired classes of claims, the Court cannot confirm a plan unless it has been accepted by at least one impaired class. If there is a consenting impaired class that accepts the plan but other impaired classes who do not, the Court can force acceptance upon those classes not consenting. This is commonly referred to as “cram down.” It is very difficult to obtain confirmation through “cram down” as the standards can, depending on the case, be very difficult to meet.

There are substantial issues and pitfalls relating to Chapter 11 cases. Before hiring an attorney, a prospective client should make sure that proposed counsel has substantial experience in confirming Chapter 11 plans. The client should ask the potential counsel for a copy of orders confirming plans in previous cases that they have handled.

As stated, Chapter 11 is very complex. One of the best summaries of Chapter 11 appears on the United States Courts website at www.uscourts.gov/service-forms/bankruptcy-basics/chapter-11-bankruptcy-basics.