Sacramento Bankruptcy Lawyer Blog

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" »

Two weeks ago, Lin Bartee, 65, and his wife, Christine Wenger-Bartee, 51, appeared in Federal District Court in Sacramento to face charges of bankruptcy fraud and tax evasion. The Bartees are originally from Grass Valley, a town a little over an hour north of Sacramento.

The couple had been extradited from Costa Rica on January 10 after spending years hiding in a remote part of Costa Rica. They were arrested in Costa Rica in May 2009 and had fought extradition, but U.S. Marshalls successfully escorted them back to the United States.

The indictment by the U.S. Attorney General's Office in Sacramento charges the couple with conspiracy to avoid paying federal taxes, making false statements in a bankruptcy case, and concealing property in a bankruptcy case. The Bartees allegedly joined IRS Code Busters, a protest group that helped members scheme to avoid paying the IRS. The Bartees failed to file tax returns in 2001 and 2002 despite healthy income and ownership of a number of businesses. In 2002, they transferred $240,000 to Wenger-Bartee's parents, who wired $146,000 of the money to a bank in Costa Rica.

The Bartees filed for bankruptcy in April 2003 and did not list the IRS as a creditor despite owing $181,000 in unpaid taxes. Their bankruptcy filing also failed to list 2002 income and falsely claimed gambling losses. The bankruptcy court denied the couple's discharge in 2004, and the trustee uncovered evidence that the Bartee's had illegally transferred assets prior to the filing. They did so, presumably, because they wanted to prevent the trustee from seizing the assets to pay their creditors. After uncovering the illegal transfer, the trustee referred the case to the U.S. Attorney's Office.

The Bartees pleaded not guilty at their arraignment on January 12 and will next appear in federal court on February 8. The maximum penalty they face is five years in federal prison.

The Chico News & Review just published a lengthy feature story about gambling in Oroville. Oroville is one of the poorest towns in California, but ironically has two Indian casinos. The article relays three hard-luck gambling stories that highlight how swiftly and utterly a gambling addiction can bring down personal finances and a person's otherwise healthy life.

The three individuals detailed all recount how gambling took over their lives and caused them to make a string of decisions that they knew were against their best interests. The first story is about a woman who gambled away her entire $70,000 401(k) in a four-day gambling binge. She eventually filed bankruptcy and had to move back in with her parents. Her bankruptcy attorney reports that a fair number of his clients arrive with gambling debt. He has a problem with casinos who allow customers to withdraw money by writing personal checks, and often times those checks bounce. Technology exists that would provide casinos with the ability to verify whether there is enough money in a customer's account before the withdrawal. But, casinos choose to provide the money anyways and pursue the gambler later.

The second and third stories detail men who allowed gambling to derail their careers. Gambling took precedence over work and over family obligations. Both received staggering amounts of credit, which fueled their habits. After hitting bottom, both overcome their addictions by being motivated to clean themselves up for family members and with the help of Gamblers Anonymous.

The author, Jaime O'Neill, does a wonderful job of unlocking the individuals' feelings as they look back at a period when they had no control over their lives. He also reveals how casinos gladly prey on those whose lives are going down the drain. The destruction happens right in front of the casinos' eyes and the casinos do everything short of compulsion to make that destruction happen. The article is a powerful exploration of gambling's very unglamorous dark side.

Central Valley bankruptcies were way up in 2009 due to the recession, plunging home values, foreclosures, state government furloughs, and double-digit unemployment. There were over 45,000 personal and business bankruptcies filed in U.S. Bankruptcy Court, Eastern District courthouses in Fresno, Modesto, and Sacramento. Sacramento was the busiest with nearly 29,000 filings. The Eastern District total represents more than twice as many as the 17,400 cases filed in 2007, and 50 percent more than the 31,000 cases filed in 2008. In California, filings were 58% higher than in 2008.

Unemployment has hit the Central Valley especially hard. The unemployment rate in the Valley tops 17% and very well may hit 20% before there is a recovery. Correspondingly, predictions are that bankruptcy filings may be even higher in 2010. In addition to the above issues, the commercial real estate market has been floundering and may further dampen jobs figures.

The Sacramento Business Journal reports that New Horizons Reverse Mortgage has filed for Chapter 7 bankruptcy. It leased major office space at the beginning of 2009, but almost immediately had trouble making payments as their lease coincided with a sharp decline in sales.

The Folsom company was a major lender of reverse mortgages in the Sacramento area. It endorsed 321 mortgages in 2008, but only 184 in 2009. New Horizons appears to have succumbed to the busting of the housing market.

A reverse mortgage enables elderly homeowners (62+) to convert equity in their home into tax-free cash without having to sell the home, give up title or take on a new monthly mortgage payment. Upon sale of the home or the homeowner's passing, the amount that the bank lent, plus interest and fees, becomes due.

But, banks have been just as unwilling to lend to prospective homeowners as to elderly homeowners with equity. Also, homeowners have seen a steep decline in their equity as home values have plummeted. Both factors add up to a dismal market for reverse mortgages.

New Horizons predicted a growing market for reverse mortgages as the Baby Boomer generation approaches eligibility and retirement. That still may occur, but before it does banks must lend more willingly and housing prices will have to recover.

Some people only think of the negatives when it comes to bankruptcy, but investment banks and venture capitalists have found bargain deals in claim trading by purchasing the "claims" of creditors against companies that go bankrupt in order to profit from restructures.

When creditors are notified of a bankruptcy, they file claims for money owed such as when a supplier files a claim for products unpaid. These rights to payment or claims are routinely bought and sold based upon the buyer's and seller's expectation of the recovery in the case.

The sellers of bankruptcy claims may sell their claims at discount. Some people think that just because a company has filed bankruptcy, they may never get paid. These creditors would rather recover something and get paid as soon as possible rather than risk holding out for a better return in the future. After assigning the claim, the seller should monitor to make sure that it is paid when the payment conditions are met.

Buyers of claims search bankruptcy court dockets for potential sellers. They pay for claims when they think there is an eventual payout to them, and deduct a commission. For example, if a claims trader is offering to pay 40 cents on the dollar, that trader believes the value of the claim will increase above 40 cents. Trading bankruptcy claims is regulated by the Bankruptcy Code Rule 3001(e), and contract principles. Claim rights transfer as if the investor had paid the full face value for the claim, even if the actual purchase price was discounted from the face value.

Continue reading "Claim Trading" »

In Chapter 13, after the debtor attends a 341 hearing, and the bankruptcy plan is filed, the next event is the confirmation hearing where the court approves the discharge of debts if there are no creditor oppositions.

The debtor is required to attend the confirmation hearing as the bankruptcy plan is reviewed by the court and Chapter 13 Trustee. If the debtor fails to appear for the hearing, the judge can prevent or delay the confirmation.

The bankruptcy lawyer for the debtor needs to present a plan that protects debtor interests by making payments manageable, that ensures the plan will be confirmed by the court. When attending confirmation hearings, review the calendars prior to entering the courtroom to stay on track with whether a case is on the dismissal, uncontested, or contested calendar. The lawyer analyzes the parties' income and expenses, and makes certain the budget is not excessive or has frivolous expenses.

When an objection to confirmation is filed, the objecting party, or its attorney, attends the confirmation hearing. The views of the objecting parties and the Trustee are heard by the judge. The judge confirms the plan, denies confirmation, or sets an evidentiary hearing on the disputed matter (e.g. a valuation issue, a bad faith objection, a disposable income objection). Often objects relate to payments offered under the plan being less than creditors would receive if the debtor's assets are liquidated or the debtor's plan does not commit all of the debtor's projected disposable income for the commitment period.

The provisions of a confirmed plan bind the debtor and each creditor. If the court confirms the plan, the Chapter 13 Trustee will distribute funds received under the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to confirm, the debtor may file a modified plan, or convert to a liquidation case under chapter 7. 11 U.S.C. § 1323. 11 U.S.C. § 1307(a). If the court declines to confirm the plan or the modified plan and dismisses the case, the court may authorize the Trustee to keep funds for costs, and return remaining funds to the debtor 11 U.S.C. § 1326(a)(2).

A discharge is provided under Chapter 13 when the debtor completely performs under the plan. The discharge releases the debtor from all debts provided for by the plan or disallowed. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal against the debtor to collect discharged obligations.

Continue reading "Confirmation Hearing" »

Single Asset Real Estate (SARE) refers to real estate entities attempting to hang on to real property ownership consisting of a single property or project, other than residential real property
with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and incidental activities. Bankruptcy Code Section 101(51)(B).

Chapter 11 cases for a SARE entity may be about raising new capital, renegotiating loans, or selling the asset. The SARE debtor must file a plan of reorganization that has a reasonable possibility of being confirmed, or make monthly payments to each creditor whose claim is secured by the real estate.

Many people lose their properties when they start falling behind on bills. If the bills relate to property taxes, a debtor may lose real estate in a tax sale. People who lose their homes in tax sales may not realize that they may have income potential from excess proceeds. This is because when people become homeless, they might not fill out a forwarding address form at the post office, and are not notified by counties that any excess proceeds after the liens on the property are paid belong to the debtor. California Revenue and Taxation Code Section 4675.

This creates a niche market for entrepreneurs like John Lane, who wrote "Making Big Money with Over Bid Refunds". Lane launched National Asset Recovery where he helped former homeowners recover unclaimed tax excess funds in exchange for 25% of all money owed. Though businesses like Lane's may not be scams, people in California should be aware that they can easily fill out forms found on the web sites of California counties to obtain unclaimed property, and save on the 25% fees.

Continue reading "Single Asset Real Estate" »

Senators Mark Warner and Bob Corker are proposing setting up a new, separate bankruptcy court to handle complex financial firms in need of restructuring. Their goal is to create a superior alternative to government takeover when a firm "too big to fail" threatens to go under and destabilize the entire economy.

Warner, a Virginia Democrat, and Corker, a Tennessee Republican are collaborating on the legislation. The crux of their plan is to ensure that a specially-trained judge oversees the resolution rather than a government agency. One option is to designate one federal judge in each U.S. Circuit as a financial bankruptcy specialist. Another option is to set up a separate court entirely separate from the current bankruptcy courts. Currently, the FDIC and various other government agencies have the authority to take on large institutions' failures.

The Obama administration has come out against Warner and Corker's proposal. It maintains that the federal government's work with Lehman Brothers Holdings Inc.'s bankruptcy proves that the federal government can successfully wind down large financial firms outside of the court system. Obama is also skeptical of bankruptcy because bankruptcy may shield creditors from losses, and the president wants to ensure that creditors and shareholders take their fair share of losses when a firm fails. Warner and Cocker's proposal does allow for a government-controlled takeover if the Treasury, the Federal Reserve, and other agencies determine that such an extreme measure is necessary.

A prominent Sacramento bankruptcy attorney will be sworn in as the newest federal bankruptcy court judge for the Eastern District of California later this month. Ronald H. Sargis has been a bankruptcy attorney with Hefner, Stark & Marois, LLP and the California Association of Collectors for the last 25 years. During that time, he has worked on reorganizations, argued appeals with the District Court and Ninth Circuit Court of Appeals, taught bankruptcy at Sacramento-area colleges, prepared creditors' rights education materials, and helped to shape collection industry policy. He has earned the respect and admiration of many in the local bankruptcy industry.,

As a federal bankruptcy judge, Sargis's duty will be to enforce bankruptcy law and ensure that neither creditors nor debtors are abused. He comes in with inside knowledge of bankruptcy court through his clerkship with a bankruptcy judge out of law school.

Every debtors bankruptcy plan, no matter how straightforward, must be approved by a bankruptcy judge. Sargis will surely have his hands full right off the bat with the high number of people currently filing bankruptcy.

As expected, the final 2009 numbers showed a spike in bankruptcy filings. There were 1.43 million bankruptcy filings in 2009, a 32 percent increase from 2008. Consistently, every month in 2009 reported bankruptcies in excess of the same month in 2008. Last month, there were 22 percent more bankruptcies than in December 2008.

The recession has caused bankruptcies to reach a level that has not been approached since 2005, when Congress rewrote the Bankruptcy Code to discourage consumers from filing bankruptcy. This year's 1.43 million filings was the seventh-highest year on record, behind 1998 and 2001-2005.

Some experts contend that the 2005 Bankruptcy Code reform has been ineffective. They attribute the decline in bankruptcies after 2005 to the healthy economy, the surge of people filing bankruptcy in 2005 to avoid the new rules, and the new rules making bankruptcy more expensive and time-consuming. The reform had intended to prevent filers from abusing the system. But, those safeguards are now costing filers more money and delaying relief to families that need protection from creditors or need to save their homes.

This year does not project much, if any, reduction in bankruptcies. Foreclosures and subprime mortgages going bust will likely continue. And many more families may be under financial stress due to unemployment and underemployment in 2009.

A hallmark of the economy's collapse has been investment schemes gone wrong. Richard Betchley, an El Dorado Hills entrepreneur, has been charged with 30 counts of grand theft and securities violations, including bank fraud and tax evasion, for misusing nearly $2 million of investors' funds.

Betchley received nearly $2 million from friends, neighbors, and banks to invest in development property behind his former home in Serrano, California and in PostShield, a Southern California company Betchley helped oversee that was trying to sell a PVC resin sleeve to the California Department of Transportation. But, a notice of default was posted on the property in late 2008 and Betchley filed for bankruptcy in early 2009.

Prosecutors and Betchley's defense attorneys held preliminary hearings in El Dorado County Superior Court over two days at the end of December. Prosecutors claimed that Betchley used investors' money to fund his lavish lifestyle. Betchley's attorney indicated that investors' fortunes had merely mirrored the economy and the housing market. He brought forth evidence that Betchley had spent hundreds of thousands of dollars to develop the property.

These cases are very difficult and time-consuming for the government to prove. It will have to pour over mountains of financial documents and try to disentangle improper and proper uses of money.

Dale Randall Goebel, Plaintiff And Appellant v. James Lauderdale, Defendant And Respondent 214 Cal. App. 3d 1502, 263 Cal. Rptr. 275 (Cal.App.Dist.6 09/29/1989) relates to Appellant Dale Randall Goebel suing James Lauderdale for attorney malpractice. Lauderdale was a practitioner in Monterey County, focusing on bankruptcy.

The trial court granted respondent's motion for nonsuit on the grounds that the action was barred by the one-year statute of limitations and because appellant did not establish a prima facie case of negligence. A motion for nonsuit is a ruling by the judge in a lawsuit when the plaintiff (the party who filed the suit) does not proceed to trial at the appointed time or has presented all his/her/its evidence and, in the judge's opinion, there is no evidence, which could prove the plaintiff's case. A nonsuit terminates the trial at that point, and results in a dismissal of the plaintiff's case and judgment for the defendant.

On appeal, the Court Of Appeal Of California, Sixth Appellate District ruled the trial court erred in granting Lauderdale's motion for nonsuit on the issue of negligence, and erred in granting the nonsuit based on the running of the statute of limitations.

The client served jail time for diversion of funds after following Lauderdale's legal advice. The appellate court concluded Lauderdale could have prevented his client's injuries simply by checking a statute before giving advice. Lauderdale tried to appeal to the California Supreme Court, but his case was not granted certiorari.

The Goebel case is an example of how important it is to engage an attorney who is specially trained in the law for a client's needs. The California State Bar gives a FAQ on "Hiring A Lawyer" to help consumers find a lawyer to resolve a client's particular needs. Sometimes it may not be that an attorney is not adept at a subject, but accepts too many cases, and finds perfection in rote, but when something complicated comes along, the attorney does not take the time to research the laws, or does not realize the law became outdated by new legislation.

In bankruptcy, it is important to find an attorney who understands fraudulent transfers and preference claims. Without this understanding, transfers may be voidable as fraudulent under federal bankruptcy law and state law. Judge John K. Olson of the United States Bankruptcy Court for the Southern District of Florida permitted the bankruptcy estates of TOUSA, Inc. and its debtor subsidiaries to avoid and recover more than $1 billion of liens and cash that the debtors had transferred to secured lenders in a transaction entered six months prior to the debtors' Chapter 11 bankruptcy filing. Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp North America, Inc., 2009 Bankr. LEXIS 3311 (Bankr. S.D. Fla. Oct. 13, 2009).

Sometimes get a second opinion on what an attorney advises. Check local courthouses for programs like the ACCESS Self-help Center in San Francisco Superior Court for free legal clinic. Sometimes attorneys bully clients to settle a case by threatening to withdraw leaving the client helpless with no support, going along with whatever the attorney advises. This is not the right approach when the attorney does not have the client's financial and nonmonetary future consequences in mind. A client should be able to trust an attorney to give accurate and complete legal information, and not have to research the law on his/her own.

Continue reading "Dale Randall Goebel v. James Lauderdale" »

The following is a fictitious scenario:

Patrick lived back in the days when he was a greedy associate. Despite public displays of good acts, Patrick chipped away his character, billing for all his fees secretly, little-by-little, over time to do favors for clients in exchange for billable hours. He used his law firm and clients' investors' resources to file lawsuits for clients' employees, officers, directors, working on personal injury, family, and other personal matters unrelated to clients' investors' interests and unconnected to the firm's concentration on technology and life sciences. People just did not know which "clients" paid his invoices. Patrick commented on blogs for notoriety. On the attorneys who no longer represented a prominent financier and philanthropist charged with fraud centered on an $8 billion investment scheme, when the attorneys did not have assurance he had money to pay: Obviously attorneys would like to get paid, and that's how we eat and feed our families.

If only fiction did not intersect with reality, but in this world, the seemingly giving may also be "Ponzi" schemers. The Securities and Exchange Commission (SEC) filed a securities fraud action against Stanford International Bank, Ltd. on February 16, 2009 for an alleged multi-billion dollar Ponzi scheme. The SEC argues the Stanford companies sold certificates of deposit issued to innocent investors by "promising above-market returns and falsely assuring investors that the CDs were backed by safe, liquid investments." The proceeds of new CD sales were applied to payments on previous CDs. The issuers lacked actual funds to cover liabilities it incurred.

The district court appointed a receiver and issued an injunction freezing investment accounts at investment firms. The receiver named the account owners as relief defendants, but did not allege wrongdoing. A relief defendant is a "nominal defendant [who] has no ownership interest in the property that is the subject of litigation but may be joined in the lawsuit to aid the recovery of relief." If the relief defendant "(1) has received ill-gotten funds, and (2) does not have a legitimate claim to those funds," the relief defendant may be subject to equitable disgorgement of the ill-gotten funds.

On November 13, 2009, the Court of Appeals for the Fifth Circuit ruled that the appointed receiver lacked authority to "claw back" principal and interest proceeds distributed to innocent investors/creditors. They have a legitimate ownership interest in the proceeds held in the accounts.

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The following is a fictitious scenario:

In San Francisco for a debtor's questionnaire hearing. Each time the judge makes an order, he asks, "Do you agree to obey all laws?" Hmm. It sounds so obvious, but guess sometimes when people cross the lines frequently enough, the lines disappear. The defendant is Christine, 42. She's on the boards of Opera clubs. Since receiving her rhetoric degree 19 years ago, she has been continuously employed at advertising, public relations, and high technology companies. Perfectly polished speech, and quoted in Style pages about her opinions on entertainment. She grew up in San Jose with dreams of medicine, doing well in science during high school. Rhetoric was an elective, but she switched majors, after flunking calculus during freshman year when her parents divorced, and her younger brother, Edward got a DUI. She lives in a one-bedroom Fillmore Street apartment in San Francisco. While in college, she dated a man for 5 years, but the relationship soured after graduation, and she has not since met anyone long-term though she spends $500 to $2,500 for tickets and black dresses to opera galas. There are judgments against her by several credit card companies. The balances are a few thousand dollars. Why's she unable to pay when she has never suffered unemployment?

A debtor examination hearing, is when the debtor is examined at the courthouse about what assets he/she owns and where they are located. This usually occurs after a judgment is entered against someone such as when a credit card company enters a default against a cardholder who fails to pay invoices and does not appear in court to dispute. The examiner discovers where the debtor lives, any property owned, employer, wages, bank accounts. If the debtor does not show up, the court may continue the hearing and send the debtor a warning for a bench warrant if the debtor does not show up for the next hearing. On the next hearing if the debtor still does not show up, a warrant may issue for the arrest of the debtor for failure to obey a court order to show up for the exam.

To help people better invest, and stay out of debt, the SEC has launched a website devoted to "investor education, providing investors with in-depth information and 'top tips' on how to invest wisely, plan for the future, and avoid being scammed." Visit www.investor.gov to access information in what the SEC considers a user-friendly format that includes sections for those getting started investing. For example, those saving for a child's education, and for those planning for retirement, there is the "Seniors Care Package". Investor.gov offers a section exclusively in Spanish. "En Español" presents information about what to do if an investor feels that he/she has been a fraud victim, as well as a Spanish-language podcast explaining the history and functions of the SEC.

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In an interview with Bloomberg, the preeminent bankruptcy attorney in the country, Harvey Miller, warned that real estate bankruptcies may soon rise. Miller is the lead bankruptcy attorney for Lehman Brothers Holdings Inc. and a partner at the law firm Weil Gotshal & Manges LLP. Lehman's bankruptcy was the largest in U.S. history, as it filed with assets totaling $639 billion.

Miller explained that financial institutions are holding "huge amounts of real estate debt," but are not calling the loans due even though property owners are breaching the loan covenants. The institutions are granting extensions hoping that the borrowers will be able to come up with the money. But, the real estate climate has not improved, and lenders will eventually have to act. So, lenders may soon decide that borrowers will not be able to make good on the loans. They will write down the loans and take their losses for accounting and tax purposes. With banks calling due massive loans for full immediate repayment, property owners may have to consider bankruptcy.

If Miller's prediction proves true, the result could be devastating. There are large projects hanging in the balance throughout the country, and loan defaults would indefinitely suspend construction, hurting employment. Large real estate owners, such as Tishman Speyer Properties LP, may suffer huge losses and be forced to sell assets, further depressing the real estate market. Just as toxic residential mortgages spread havoc throughout the economy, there is plenty of reason to fear a similarly widespread effect if the commercial real estate market tumbles.

Four Pennsylvanians and one person from New Jersey were indicted earlier this month for a $14.5 million mortgage fraud scheme that operated from 2004 to 2007. The FBI headed a joint federal-state investigation that led to the indictments.

The scheme promised 35 struggling homeowners that they could save their homes if they allowed a straw purchaser to buy the homes and obtain new mortgages. The homeowners could stay in their homes, make partial mortgage payments, and would receive their homes back in a year.

Instead, the schemers set up phony bankruptcies and mortgages and funneled home equity through shell corporations into their own bank accounts. They targeted homeowners in desperate need of assistance and took full and knowing advantage of that desperation. Among the five indicted are a real-estate lawyer, a bankruptcy attorney, two mortgage brokers, and the wife of one of the mortgage brokers. If convicted, they face millions of dollars in fines and maximum prison sentences that would be the equivalent of multiple life sentences.

This story is another warning to homeowners to be careful before pursuing offers that are too good to be true. Make sure that the professional you work with has a strong reputation and consult with H.U.D. (877-HUD-1515) before proceeding.

Retail music chain Tower Records was borne in Sacramento in 1960 and grew to include dozens of stores throughout Asia, the Middle East, and Latin America. However, the advent of downloading music this decade spelled the end to all but a few music retailers, including Tower. Tower filed for bankruptcy in 2004 and in 2006 and liquidated in 2007.

While Tower Records no longer has any American storefronts and sadly has no more ties with Sacramento, its online web site has been revived. Operating out of Wilmington, Delaware, Tower.com Inc. is trying to reprise Tower's brand and recreate its role as a music distributor on the web. After it went out of business, the bankruptcy court auctioned Tower to a bankruptcy liquidator, which sold the website to Caiman Holdings, an e-commerce music merchant, for $4.2 million.

Tower Records birth and plight is a case study in the evolution of business over the last 50 years. Tower proliferated across the country as cassettes and CDs became popular, and it forced out mom-and-pop record stores. When the internet revolutionized the music industry, Tower was forced out by iTunes and Amazon.com. But, as brand is all-important in the wild west of grabbing consumers' attention on the web, Tower may enjoy a second life after bankruptcy. Thus, a business that began on Watt Avenue in Sacramento will continue to exist in the ether.

Sacramento received a scare recently when the Atlanta Journal Constitution reported that Thomas Enterprises Inc., a developer for Sacramento's ambitious north-of-downtown development, The Railyards, has run into financial trouble. Stan Thomas, Thomas Enterprises' founder, filed for Chapter 11 bankruptcy protection on three large projects, and almost had a fourth project go into foreclosure.

Thomas is well-known for tackling gigantic projects and financing them with his own money. Over the years, his plans have included building a seven-star boutique hotel near the Tower of London, a retractable roof stadium in Orlando, and five "mini cities" across the country. However, his ambitions outgrew the market, and the recent credit crunch prevented him from refinancing loans. He filed for Chapter 11 bankruptcy protection on a 2 million square foot San Antonio shopping center, a Prospect Park retail development, and a third project in Smyrna.

The Railyards is Thomas Enterprises' largest continuing project. The Railyards is being built on a hazardous waste site on the riverfront, and Thomas Enterprises is contributing about $100 million in environmental cleanup. Most of the infrastructure spending comes from public funding. Plans include 12,000 homes, 2.3 million square feet of office space, 1.4 million square feet of retail, a transportation hub, and a possible sports arena.

There is no indication that Thomas's financial troubles will affect The Railyards. Still, Thomas's plight has caused anxiety. Sacramento city councilman Kevin McCarty, the only council member to vote against Thomas's deal, has raised questions about Thomas's ability to finish the project. Millions of public money and thousands of potential jobs hinge on the project. Hopefully, Thomas's bankruptcy filings will prove to have contained his financial troubles.

Be wary of the attorney who advocates the "sorry" defense. The "sorry" defense is when the client admits to making a mistake, that it's human to make mistakes, and that the client will do whatever it takes to make the opposing party happy like paying whatever money, admitting to whatever liability, stipulating to whatever judgment.

Sometimes "sorry" defense attorneys continue matters making the client think they are doing something, but they are delaying the eventual result that they are not providing much of a defense, letting the other side get off easy with little litigation costs for trial.

It's admirable to accept responsibility when committing a wrong, but it's a character weakness to accept blame for unproven fault. Saying "sorry" gives away control and should be reserved for when a person is truly "sorry".

For instance, there is little reason to be sorry for filing bankruptcy. In bankruptcy, a creditor has a right to payments with a proof of claim. A debtor should not fear a creditor making him/her feel bad for not making payments.

A proof of claim is a written statement setting forth a creditor's claim. There is an official form for filing proofs of claim that comply with the Bankruptcy Code and Rules. The deadline for filing proofs of claim is fixed by a Bankruptcy Court.

The proof of claim gives notice to the Bankruptcy Court, the debtor-in-possession/trustee, and other interested parties of the creditor's claim. It establishes the amount of claim, and identifies whether it is a secured or unsecured claim, and any priority.

A secured claimant who has perfected a security interest in collateral is entitled to receive a distribution from specific property before any other creditors can recover from that property. If the claim is unsecured, the Bankruptcy Code establishes priorities giving the order in which unsecured claimants are paid.

If unchallenged, the creditor will be entitled to receive distributions from the debtor's estate once a proof of claim is filed. After an objection is filed, the creditor submits a written response.

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Social media are Internet media created through social interaction, where individuals produce the content. Examples:

• Social networking: These websites host communities that allow individuals to interact with each other socially (Facebook, MySpace, LinkedIn).
• Blogs: These are individual online journals or commentaries that allow social interaction through public comment (Twitter).
• Virtual worlds: These are online gaming communities where individuals interact through online characters (avatars) (Second Life, World of Warcraft).

During the week of December 9, 2009, Facebook announced privacy changes that prompted all users to review their settings. Though Facebook intended with its defaults to make user content more open, it seemed most users changed their settings to hide information from public views.

Law enforcement and attorneys have started to use what is placed on the Internet in public view in discovery. There is the example of the unnamed Swiss woman being fired in early 2009 when she said she had to be away from her work claiming migraines made her too ill to use a computer, but was then active on Facebook. Virgin Atlantic terminated 13 cabin crew members after they posted disparaging comments about the airline and its customers on Facebook.

Employers can access more information about people by using social media than available by a résumé, including follow an employee on Twitter. In making employment decisions, employers can use information relating to illegal drug use, poor writing skills, and racist or discriminatory tendencies.

Supervisors and co-workers are asked to "recommend" former employees on LinkedIn. Be careful of who to seek as references. Once permission is given to someone to be a reference, any defamation claims may be waived.

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The morning routine isn't to just start work. It's to check stock prices, read Yahoo! headlines, and browse the American Corporate Counsel newsstand. Success requires noticing when sectors converge and turning data points into trends. Stay on top of the news to be aware of what potential business partners and competitors are up to. The following recent bankruptcy filings give insight on whom to do business with.

Gumba Investors filed for Chapter 11 bankruptcy. Debtor's assets may be available for acquisition. The Debtor's real property totals $304,875,000 and consists of the following located in Oroville, California: 2053 Nelson Avenue valued at $360,000; 6539 Jack Hill Drive valued at $275,000; 827 Grand Avenue valued at $220,000; 8824 Highway 99 valued at $300 million; Baldwin Avenue valued at $50,000; Dillard Court valued at $110,000; Kanaka Drive valued at $110,000; and Lincoln Boulevard and Mitchell Avenue valued at $3 million; 705 Cottage Lane in Susanville, California, valued at $750,000. The Debtor lists no income.

Blossom Valley, Inc. filed for Chapter 11 bankruptcy. Debtor's assets may be available for acquisition. The Debtor's real property total value is $34,375,000 and consists of: Grandview Condos located on North Capital Avenue in San Jose, California, valued at $12.6 million; Messina Condos located on North Capital Avenue in San Jose, California, valued at $16,775,000; Oak Knoll Single-Family Homes located on San Felipe Road in San Jose, California, valued at $5 million. Debtor's personal property includes furniture, art, TVs, decorating items located in models located at Messina Gardens, valued at $80,000. Debtor has home purchase contracts with six individuals. Debtor's income for 2007 was $9,927,411; for 2008 was $7,948,628; for 2009 to date of bankruptcy petition was $3,457,768.

451 Oro Dam Blvd., LLC filed for Chapter 11 bankruptcy. Debtor's assets may be available for acquisition. Debtor owns property located at 451 Oro Dam Boulevard in Oroville, California, valued at $7.8 million. Debtor's personal property includes accounts receivable of $18,641. Debtor has leases with 17 tenants, including Cash Advance; Cassidy's; Coldwell Banker; Fidelity National Title Co.; Jim & Jan's Donuts; La Spa; Subway.

Diamond Oaks Vineyards, Inc. filed for Chapter 11 bankruptcy. Debtor's assets may be available for acquisition. Debtor's real property is valued at $18.6 million and consists of: 4500 St. Helena Highway in Calistoga, California, valued at $8.8 million; 26900 Dutcher Creek Road in Cloverdale, California, valued at $4.2 million; and 4529-4531 St. Helena Highway in Calistoga, California, valued at $5.6 million. Debtor's personal property includes: accounts receivable of $6,453,637 (includes estimated grape sales); Ford F-150 truck valued at $6,000; office equipment valued at $2,000; 154 acres of crops value at $762,000; and farming equipment valued at $346,660. Debtor's income from sale of the grape harvest for 2007 was $1,012,511; for 2008 it was $830,129; for 2009 to date of bankruptcy petition was $477,600.

925 Oriole, LLC filed for Chapter 11 bankruptcy. Debtor's assets may be available for acquisition. Debtor owns a developable residential lot located at 925 Oriole in Laguna Beach, California, valued at $3 million. Debtor does not list any income.

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Distressed properties continue to flood the market and depress housing prices. This, along with a rush to take advantage of an $8,000 federal tax credit that was originally set to expire on November 30, caused home sales to spike in November. Sales were 7.4% higher than in October and were a whopping 44.1% higher than in November 2008.

The median sales price for existing homes dropped by 4.3% from a year ago, to $172,600. In the Western United States, the drop was 4.1% to $231,000. The price drop indicates that greater supply had more to do with the higher sales than did increased demand. In fact, 33 percent of November sales were distressed properties.

Sacramento was one of three areas, along with San Diego and Riverside, that had lower sales, likely because there were inventory shortages for lower-priced homes.

Unless lenders more aggressively seek loan modifications and other arrangements with homeowners, the supply of distressed homes will not taper off anytime soon. Economists foresee 1.7 million homes heading for sale due to foreclosure or delinquency. Because Congress ended up extending the tax credit through April 2010, there will likely be another surge in buying then.

Lenders and the federal government will greatly influence the direction of the housing market. If lenders flood the market with foreclosed properties and short sales, then prices will drop further. But, if the Obama administration's program to assist homeowners with working out loan modifications rebounds from its initially sluggish start, then the housing market may have a steadier recovery. Banks too should see it as in their best interests to more steadily introduce homes onto the market and maintain the value of their housing stock.

Bloomberg reports that prosecutions for bankruptcy fraud are at their lowest level in two decades despite a steep rise in bankruptcy filings due to the recession. The number of bankruptcy prosecutions dropped significantly after 9/11, when the federal government began prioritizing national security cases. However, with the financial meltdown revealing a number of scams and financial wrongdoing, the government has begun to shift its focus back towards white collar crime.

Bankruptcy fraud typically occurs when a debtor hides assets or money from creditors. The law requires that debtors disclose all of their financial information so that the trustee can collect assets and divvy them up among creditors. According to the Justice Department, over the fiscal year that ended September 30, prosecutors classified only 82 cases as bankruptcy fraud. That is the lowest number since 1986.

Bloomberg's article cites an anonymous former U.S. prosecutor who claims that tips are often not followed up on because of a lack of investigators. Proving fraud is a time and resource-intensive process for law enforcement. Doing so often times requires pouring over mountains of financial documents. There is rarely a smoking gun. Instead, prosecutors must infer fraudulent intent from the nature of financial transactions.

The FBI has recently assigned more agents to investigate crimes associated with the financial crisis, including mortgage fraud. Still, the FBI admits that bankruptcy fraud is not among the top five white-collar threats, and therefore it will probably not see much more attention.

Hopefully, more reporting will be done on the lack of bankruptcy fraud investigations so that the government intensifies its oversight. Fraud perpetuates distrust of the bankruptcy system. The vast majority of debtors file their paperwork honestly, and it is extremely unfair to them that others cheat the system and get away with it because of lax regulation.

The Los Angeles Times reports that over the twelve months that ended September 30 small business bankruptcies in California were up 81 percent over the previous twelve months. In all, 19,000 small businesses in California filed bankruptcy, compared to 10,500 the previous year. Nationally, small business bankruptcies were up 41 percent. The Sacramento area had one of the nation's highest rates of small-business bankruptcy filings.

The figures fail to account for small business owners who file for personal bankruptcy, a strategy that many bankruptcy attorneys recommend because it is simpler than filing for a business. Many small business owners personally guarantee debt and therefore cannot just close their business because they are personally liable for lingering debt. And, business owners often use personal finances to prop up their businesses. So, even if their business survives, their personal financial situation may become untenable.

Small business owners have been plagued not just by the downturn in the economy, but especially by the credit crunch. Banks have been reluctant to take on any risk, including providing loans to small businesses, even though they owe their continued existence in large part to bank bailouts funded by the taxpayer. More than just refusing to loan to vulnerable businesses, banks have rejected loan applications from businesses that have been operating healthily for years. Without funds to pay bills and employees, debt piles up and becomes unbearable.

The Obama administration is exploring providing stimulus funds aimed at small businesses. Potential plans include providing loans, temporarily suspending capital gains taxes on new investments in small-business stock, and tax incentives to encourage small businesses to hire more employees. The government must act quickly because every month more and more small businesses and businessmen flounder.