Sacramento Bankruptcy Lawyer Blog

The following is a fictitious scenario:

Guess Laud is working from home. His worn tennies are out front. Haha. Laud works for one of the behemoths in the insurance industry. Once he was too lazy to attack someone's errors when resolving a dispute. To pay a lot of money to settle a lawsuit is not expected. Rational people accept efforts to make amends and move on. When someone thinks a proposed settlement is not enough, let him justify the money he demands. If he's bent on revenge, he'll make mistakes. The court system records irrational behavior to set the appropriate amount.

The media highlights people who live double lives -married lawmaker on family matters committee boasting about lobbyist mistresses, doctor with $150K/month salary overdosing celebrity client, diligent lab technician murdering a co-worker. It's not education, family upbringing, or affluence that motivates people to cross the lines. Everyone is a mystery, changing at every meeting, transforming from kindness to hatred. There are assumptions from prior conduct, but memories do not define people in the moment.

Continue reading "Misclassification of Employees as Independent Contractors" »

Two more properties are being returned to the bank because the owners cannot afford mortgage payments. While that statement is altogether ordinary, especially with the dismal housing market over the last two years, what is remarkable is what two properties were returned.

Two massive apartment complexes on prime Manhattan real estate were returned to creditors by a partnership led by Tishman Speyer Properties and BlackRock Realty. The two major real estate investors financed and purchased Stuyvesant Town and Peter Cooper Village for $5.4 billion in 2006. The properties are comprised of 110 buildings and 11,000 apartments. Today, Fitch Ratings estimates the properties are worth $1.8 billion.

If the properties had not been returned to creditors, it was likely that the partnership would have had to file bankruptcy. The partnership could not make the $16 million January loan payment. The news represents the latest and largest in a string of major commercial real estate ventures that have ended in default. Many of the sour deals were struck in the middle part of the last decade when money was loose and the rise in real estate property values appeared unstoppable. Now, money is tight and real estate prices have fell off a cliff. Thus, it is nearly impossible for large ventures to refinance their debt.

Commercial real estate defaults have escalated recently. While the residential real estate market has been in turmoil for years, the commercial real estate market may not have reached its nadir. In December, $31 billion worth of commercial apartment properties were in default, foreclosure, or bankruptcy. Construction that began before the recession is finishing up around the country, adding unnecessary supply. And existing deals operate under valuations that are often double what the properties are worth. A dismal commercial real estate market could help impede progress in the broader economy. That's why the news out of Manhattan resonates throughout the country.

The figures from 2009 have been calculated, and as expected foreclosures in California were high in 2009, especially in the Central Valley. However, the real bad news is that a number of factors are conspiring to keep foreclosures high into 2010.

Of all U.S. cities, Merced had the third highest foreclosure rate in 2009 with 10.1 percent of households receiving a filing. Stockton came in fifth at 8.62 percent and Modesto sixth at 8.53 percent. The highest rate in the country was Las Vegas, which saw 12 percent of its homes receive a notice of default, auction, or repossession in 2009.

Unfortunately, projections for 2010 do not include optimism for a decline in these figures. Economists predict that the jobless rate will remain around 10 percent for the new year and that joblessness and underemployment will drive many to be unable to afford their mortgages. The Federal Reserve's $1.25 trillion program to buy mortgage-backed securities is done on March 31. The program helped to suppress borrowing costs, as the rate on 30-year fixed mortgages dropped to 4.71 percent in early December, the lowest level since 1972. When the program expires, there will be less buyers, and homes will linger on the market for longer, leaving vulnerable homeowners more susceptible to foreclosure.

If you worry that you may not be able to maintain payments on your home, you may benefit from speaking to an attorney who has helped many find alternatives to foreclosure.

According to the Washington Post, data from the Federal Housing Administration (FHA) foreshadows a wave of foreclosures that have yet to hit the housing market. The FHA's default rate, which measures the percentage of FHA borrowers who have missed at least three payments, jumped to 9.1 percent in December. The rate in December 2008 was a third less, 6.5%.

The high rate of defaults reflects loans made in 2007 and 2008 that are just now beginning to go south. Many of these were subprime loans with adjustable interest rates that are now resetting to higher rates and minimum payments. The FHA projects that it will have to pay out claims to lenders on one out of every four loans made in 2007 and 2008.

The FHA did not issue these loans, but insures the lenders against losses. The agency collects fees for the loans that it insures, but it may find that its short-term losses exceed its reserves. If that is the case, the federal government will have to use taxpayer money to cover the losses, something that the FHA has never done in 75 years.

The FHA is scrambling to try to stabilize itself. It ended a program that enabled sellers to cover the down payments of buyers. The program is projected to cost the FHA $10.5 billion in losses. In 2009, the loans it backed went to borrowers with substantially better credit scores - the average score now is 690, up from 630 two years ago. The agency is rapidly banning and suspending suspect lenders from making FHA loans. It is proposing a rule to raise the amount of capital that banks must hold to pay the FHA for losses due to fraud from $250,000 to $2.5 million. And, it has developed much tougher rules for borrowers - higher upfront fees, higher required down payments for those with weak credit scores, and restrictions on the amount of money that sellers can pay toward closing costs.

Still, the FHA has dug itself a deep hole. Its reserves as of September 30 were $3.6 billion, down from nearly $13 billion a year before. That latest figure is only 0.53 percent of the value of all FHA single-family-home loans. Congress requires that the rate be no lower than 2 percent. The data only reflects the payouts that the FHA has made and does not project future losses, which may be great considering the high default rate that continues to rise.

Because the FHA plays such a huge role in the housing market, its continued struggles may signal that recovery is still well into the future.

On Monday, the Ninth Circuit ruled that disciplinary fees assessed by the California State Bar are non-dischargeable in bankruptcy. A three-judge panel overruled a Ninth Circuit Bankruptcy Appellate Panel (BAP) decision that found John William Findley III could discharge his $14,000 debt to the State Bar in his Chapter 7 bankruptcy case.

Findley is a suspended Ventura attorney who the State Bar disciplined in 2005 for failing to perform legal services competently, communicate with clients, and obey court orders. Pursuant to Business and Professions Code section 6086.10, the State Bar assessed a fee of $13,463 to cover the cost of Findley's disciplinary proceedings, $406.80 to cover certification costs of court documents, $128.25 for transcript costs, and $56.89 in witness fees.

The State Bar argued that under 11 U.S.C. section 523(7) its fee assessment could be excepted from discharge because the debt is "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss." The District Court agreed, but the BAP overruled citing State Bar of California v. Taggart , 249 F.3d 987 (9th Cir. 2001), which held that attorney disciplinary costs imposed under a previous version of section 6086.10 were eligible for discharge because those cost awards were not intended as punishment.

However, the California Legislature in 2003 amended the section and added subsection (e), which states that "costs imposed pursuant to this section are penalties, payable to and for the benefit of the State Bar of California...to promote rehabilitation and to protect the public." The Ninth Circuit believes that the amendment evidences the Legislature's disagreement with Taggart and its intention to undermine the result in Taggart.

The case is In re Findlay, 08-60024.

Attensity is the text mining and analytics for companies that use social media to market their products, and to understand their customers.

The San Francisco Chronicle reported on January 8, 2010 in "Cafes juggle needs of Wi-Fi regulars, walk-ins" that this is the age of Yelp, Twitter and Foursquare. Looked at alone, online comments may seem like babble. Attensity allows people to get feedback from their customers, get into conversations with the public on their products, and innovate products and services in response.

When regular customers defect and rant online about a business' products and services rather than tell it to a business owner's face, a business needs an application to access structured and unstructured data to find information in response to queries and present insights for decision-making to respond to consumer feelings.

Attensity has an office in Palo Alto, CA, with many of its management seeming to come from Business Objects, a French enterprise software company, specializing in business intelligence that became a part of SAP AG since 2007.

In November 2009, Equifax revealed data that Northern California remains particularly vulnerable to small business bankruptcies. Three Northern California areas made the top 15 among the country's hardest hit small business bankruptcy regions during September: Sacramento, Oakland-Fremont-Hayward and the San Jose-Sunnyvale area of Silicon Valley. Whether a business fails may have a lot to do with understanding the customer voice. Companies reorganizing from bankruptcy might consider tools to better interpret and manage an organization's customer data to get information for operations decision making.

Continue reading "Attensity" »

Corel Corporation is a popular software company with more than 100 million active users in over 75 countries. It is headquartered in Canada, with its main competitors Microsoft and Adobe. It's product portfolio includes CorelDRAW® Graphics Suite, Corel® Paint Shop Pro® Photo, Corel® Painter™, VideoStudio®, WinDVD®, Corel® WordPerfect® Office and WinZip®.

While many software companies are moving to cloud computing and software as a service models, Corel seems to be stuck in the past delivering software in packaged box format through its online store, OEM, or other partner relationships.

In January 2010, Corel announced that it reduced its global workforce by approximately 20% worldwide. This comes at the same time that it got a notice from The Nasdaq Stock Market that it no longer maintains the minimum number of publicly held shares required by Listing Rule 5450(b)(1)(B) for continued listing.

In a proxy statement dated December 29, 2009, Corel intends to terminate registration under U.S. securities laws and to delist shares on both NASDAQ and the TSX promptly following the special meeting of shareholders held on January 26, 2010.

In November 2009, Board of Directors of Corel unanimously determined to recommend, on behalf of the company, that shareholders tender their shares pursuant to a tender offer.

The news on Corel demonstrates that companies are still adapting and evolving in order to meet new consumer demands and an ever changing competitive business landscape. In building operating plans for 2010, companies continue to layoff to align cost structure for financial flexibility to continue to innovate and deliver new products to the market, and to drive brand.

Continue reading "Corel Corporation" »

The following is a fictitious scenario:

An attorney working 5 years at Formaldehyde, a start up in Silicon Valley, rolls in $170K+/year. It's spot on what they say in school on "A" students becoming professors, "B" students becoming judges, and "C" students making money. Who would have guessed earning a 1.8 GPA and not even knowing what "res judicata" means could lead to a house in the sun just 5 years after graduation.

What a "cool" life Andy says. Andy moved to the Aptos neighborhood two years ago after selling the townhouse he bought following his divorce. Aptos is a small town in Santa Cruz County popular for freeride biking. On first meeting, it is surprising Andy ever married. He is short tempered. One minute he's soft, advertising in a local paper about giving thanks to a guy at the Carmel Mission, one of nine missions along California's Central Coast. The next minute he's yelling, never apologizing. He has a mean face, forehead lines, and thinks he can read someone's mind by staring with his big brown eyes. He's usually wrong, and it sucks when someone misinterprets.

Continue reading "Fiduciary Duty on Bonuses" »

Vallejo's long and trying path through Chapter 9 bankruptcy will face another important step tomorrow in U.S. Bankruptcy Court in Sacramento. Retired city employees are upset about an October vote by the Vallejo city council to cut retiree benefits.

The retirees' attorneys claim that the city is treating the retirees differently than it is treating its other creditors. They contend that the city cannot commit to cutting retiree benefits until the city has a confirmed plan out of bankruptcy. Presumably, for a plan to be confirmed, the city would have to treat its creditors equitably.

Federal Bankruptcy Judge Michael McManus will hear the retirees' claims. He has a difficult job juggling the interests of a number of employees and former employees labor groups and ensuring that these groups, which often have competing interests, will be treated equitably. He has already made a number of controversial decisions, including approving the city's reduction in debt service payments on general fund obligations. Usually, bondholders are protected from sharing in losses with creditors.

Cities and credit rating agencies around the country are watching the Vallejo bankruptcy closely. Municipalities, particularly in California, are struggling with a steep decline in tax revenue. Judge McManus's rulings could help set precedents for future bankruptcy filings by municipalities.

Things are looking up for the ethanol industry after two rough years, which is good news for Sacramento-based Pacific Ethanol. Pacific Ethanol saw five of its production subsidiaries file for Chapter 11 bankruptcy protection last spring and was in danger of being removed from the Nasdaq stock market listings in the fall because its share price consistently fell below $1. However, with some positive signs for the ethanol market, shares have climbed over $2 and the threat of being delisted from the Nasdaq has subsided.

Last year, Pacific Ethanol closed its two California plants in Stockton and Madera. In 2008, the two plants had combined to produce 40 million gallons of ethanol, according to the California Energy Commission. The plants have yet to re-open, but a plant in Idaho has resumed production and hired 35 more workers. Reopening the Stockton and Madera plants would provide a small but important boost to the struggling cities' job markets.

The renewed optimism in the ethanol market is due in large part to federal and California regulatory standards that encourage the use of low-carbon fuel such as ethanol. U.S. demand for ethanol will rise as the Energy Independence and Security Act of 2007 set forth incremental increases in renewable-fuel volumes with the goal of reaching 36 billion gallons by 2022. The United States produced 10.5 billion gallons in 2009. In California, demand is predicted to almost double in 2010 from 950 million gallons to 1.6 billion. California's low-carbon fuel standard calls for gasoline in California to be blended with 10 percent ethanol this year, compared to 6 percent last year. The regulation mandates that California's transportation fuels only contain 10 percent carbon by 2020.

Stuart Talley, a Sacramento-based attorney, is challenging a $950,000 settlement between a San Mateo-based debt reduction company and the San Mateo County District Attorney's Office and the California Department of Corporations. Freedom Debt Relief agreed to settle allegations that the company overcharged and misinformed its customers.

The San Mateo County District Attorney's Office and the California Department of Corporations sued Freedom Debt Relief on behalf of the company's customers. According to the October 2008 lawsuit, the company claimed that it could get people out of debt within one to three years and even offered a money-back guarantee. However, the company failed to contact customers' creditors, which caused customers to go through bankruptcy in addition to paying a hefty fee to Freedom Debt Relief.

Talley, who has a separate lawsuit against the company in federal court, wants a judge to undo the settlement or force the company to fix what he thinks is wrong with the agreement.

The terms of the agreement reached in December called for Freedom Debt Relief to refund $500,000 to customers and pay $450,000 to the San Mateo County District Attorney's Office and the California Department of Corporations to compensate them for their investigations. The agreement calls for clients who contracted with Freedom Debt Relief between Nov. 1, 2004, and May 31, 2008, to receive a partial refund in return for them signing an agreement that would prohibit them from filing further lawsuits on those transactions.

Talley alleges that the agreement fails to ensure that all Freedom Debt Relief customers will receive a refund and maintains that refunds may be mere pennies on the dollar of what customers were overcharged. At the time they sign the agreement, former customers will have no idea how much of a refund they will receive.

Freedom Debt Relief's attorney denies Talley's allegations. The matter will be heard before San Mateo County Superior Court Judge Carol Mittlesteadt on February 5.

With the economy recently, even good news is bad news. The Federal Reserve announced that in November 2009 Americans borrowed $17.5 billion less on their credit cards than the previous month. To illustrate what a big shock this was, economists had predicted that the decline would be $5 billion. It was the largest month-to-month drop since the Federal Reserve started keeping track in 1943. It was also the tenth consecutive month that total credit and borrowing on credit cards fell.

Economists have been warning for years about Americans' overreliance on credit, so borrowing less would seem to be good news. But, the bad news is that if Americans aren't borrowing they aren't buying. The American consumer is the engine that runs the economy. Consumer spending accounts for about 70 percent of U.S. GDP. Less buying means that it will be that much harder to jump start the recovery. With less demand, manufacturers and retailers will continue to shed jobs and not hire.

Still, on the plus side, Americans appear to be thinking differently about debt. Whereas before, many Americans almost felt nonchalant about purchasing on credit, there is more recognition today of the dangers of debt because tomorrow will not necessarily provide money to pay for today's purchases.

And consumers are not the only ones who have changed their habits. Before, credit card companies lent money wildly, in total disproportion to customers' abilities to pay. However, they have cut lending, as consumers have less income and are thus bigger risks.

To return our economy to prosperity, the country will have to rely on consumers' renewed hunger for purchasing goods. Hopefully, though, Americans can return to that mindset without renewing their unhealthy comfort with credit card debt.

There are pluses and minuses to loan modifications. "Loan modification" means any modification to an existing loan, whether or not the loan is in default. Modifications range from loan extensions to restructurings. "Loan workout" means any resolution to a loan default consented to by the lender, borrower. The following lender options when dealing with a loan default:

• extension of loan's due date;
• forbearing interest in exchange for additional collateral to the lender;
• reduce loan payment rate;
• reduce loan interest rate;
• exchange debt for equity;
• filing bankruptcy against the borrower.

Negotiation begins with a pre-negotiation letter, where the bank attempts to have borrower waive duty to negotiate in good faith. In closing, the lender will want to maintain loan priority through the mortgage modification and title insurance policy endorsement.

Most borrowers want to keep their property. Modification is a solution for those whose current financial situation would cause default through foreclosure or short sale. The income tax consequences of a foreclosure may realize taxable income even if the owner receives no cash, leading to insolvency. In a short sale, the sale proceeds fall short of the balance owed on the property's loan. If the borrower had a second lien on the property, such as a line of equity, the borrower would not have funds from the sale to pay any mortgages after the primary. The second lien holder would face unsecured debt once the property is sold, similar to the priority of a borrower's credit card companies in the event of a bankruptcy.

Modification allows the lender to avoid litigation expenses. The lender is poorly equipped to manage the mortgaged property if the lender takes over management as a "mortgagee in possession," or acquires it at a foreclosure sale. The lender will be exposed to tort claims such as personal injury occurring as a result of a sidewalk. In litigation, for borrower might defend as to unfairness in the loan agreement, but if the borrower loses, the lender is able to obtain a judgment and place a lien on the borrower's other property or wages, plus post-judgment interest at 10% in California.

If the lender refuses a loan modification, the borrower may file bankruptcy to maintain control of the property. The borrower can propose a reorganization plan that will leave the borrower in control of the property following confirmation of the bankruptcy. A reorganization plan imposed on a lender, over its objection, is a cramdown plan. In a cramdown plan, the lender may be entitled only to payments with a present value not exceeding the fair market value of its collateral, even if the value of the collateral is substantially less than the unpaid balance of the loan.

Continue reading "Loan Modification and Loan Workout" »

The December 5-6, 2009 issue of the Wall Street Journal reported Terrance Watanabe filed a lawsuit against Harrah's in Las Vegas, NV while awaiting trial on felony charges stemming from gambling debts. Once a man who owned a trinkets company that raked in $300 million in revenue, Watanabe blew $127 million at casinos. Watanabe sold his Omaha mansion for $2.66 million to a developer, but still has not paid back the casino the credit it extended that he lost.

Watanabe's story is an example that those who do well may still fall. Be careful when purchasing assets from a seller who might subsequently file for bankruptcy protection. Fraudulent conveyance claims, which could void a sale, can be brought under the Bankruptcy Code if the seller files for bankruptcy protection within two years of the transaction.

A fraudulent conveyance is a sale entered into with the actual intent to hinder, delay or defraud the seller's creditors. A transaction may be found to be a constructive fraudulent conveyance if the seller (a) did not receive "reasonable equivalent value" and (b) was insolvent at the time or became insolvent as a result of the transaction.

The Chapter 7 Trustees in the Pope & Talbot and Specialty Motors bankruptcies filed preference complaints in the United States Bankruptcy Court for the District of Delaware before the Honorable Christopher S. Sontchi. George Miller is the Chapter 7 Trustee in the Pope & Talbot bankruptcy. Jeoffrey Burtch is the Trustee in the Specialty Motors (aka "Von Weise Inc.") bankruptcy. The complaints sought the avoidance and recovery of alleged preferential transfers from creditors of the debtors.

If an insolvent seller received less than fair consideration, the remedy is to unwind the transaction or to recover the judicially-determined value of the asset from the buyer, less amounts paid.

Factors to consider when buying distressed assets to minimize fraudulent conveyance risks include asking: Has there been an auction process? Were the assets marketed by an independent third-party investment firm? Has an independent third-party provided a fairness opinion? Will the seller remain solvent?

Buyers of assets from a seller cannot be forced to take on liabilities of seller, but when assuming contracts, a buyer accepts seller liabilities. Ameliorate contractual liabilities with indemnity or escrow provisions the purchase agreement.

Continue reading "Fraudulent Conveyance" »

In November 2009, the Bureau of Labor Statistics announced that the unemployment rate edged down, but if current unemployment is caused by lack of innovation there will be few industries requiring a large workforce in the long run. Healthcare and clean tech developments will lead to hiring, but for those with specialized knowledge.

Companies that survive this recession will do so through consolidation or the building of simple systems that leave platforms to the collective intelligence of users to innovate. The decline of jobs from user-generated content is seen in entertainment with the low production cost of reality tv shows, technology with open source applications, advertising with "friends" for marketing, and news with the advent of blogging. Companies in the past based employment on future earnings, but now shift from forecasting to live more by the moment and base hiring on cash at hand, rather than revenue.

Employment will be less defined as regular and full time, and more as "as needed". With individuals creating their personal brands through social networking, solutions to unemployment may require reducing payroll taxes and benefits costs (e.g. health, sick days) to businesses, and increasing society funded programs that allow workers to purchase benefits on their own at low costs similar to the debated government-sponsored health insurance program.

Continued unemployment will lead to further housing foreclosure in 2010. But housing foreclosures are also caused by people's lack of understanding that housing is not meant to be a short-term investment, but a consumption product with long-term investment characteristics. Solutions to stabilize housing prices will result from low interest rates and tax incentives for those who can get credit, but reform in lending standards requires suitability analyses for money borrowers.

Based on numbers from the Administrative Office of the U.S. Courts, about 1.4 million bankruptcy cases were filed between October 1, 2008 and September 30, 2009. The year before, 1 million cases were filed. Chapter 11 filings increased by 68 percent, business filings overall increased by 52 percent, and non-business filings jumped by 34 percent. The bankruptcy system is intended to be a last resort for those who can't meet monetary obligations.

In 2005, major changes to bankruptcy laws prevent consumers from abusing bankruptcy laws to clear debts they can pay. Those who oppose the 2005 changes argue the law favors creditors making it more possible for them to receive payments through increased Chapter 13 repayment plans, higher attorneys fees (resulting from fewer attorneys taking cases for fear of fines when a client's case is found inaccurate), and qualifying tests.

The law requires debtors to meet with an approved credit counselor for a 90-minute session 6 months prior to applying for bankruptcy; and before discharging debts, debtors need to attend money management classes.

Since many Chapter 7 filers don't have assets that qualify for liquidation, creditors sometimes get nothing. Since 2005, fewer people are allowed to file Chapter 7; more are forced to file Chapter 13. Before 2005, the judge could determine if a case qualifies for Chapter 7; under 2005 law, whether a debtor can file Chapter 7 depends on a two-part means test that compares a debtor's income to his/her state's median income and an analysis of the debtor's ability to pay 25% of his/her unsecured debt.

Continue reading "2010 Outlook on Unemployment and Housing Foreclosures" »