REAFFIRMATION AGREEMENTS UNDER BAPCPA Volume XXIII, No. 1 Winter 2007

Volume XXIII, No. 1
Winter 2007
REAFFIRMATION AGREEMENTS
UNDER BAPCPA
By William F. Stone, Jr., Bankruptcy Judge for the Western District of Virginia at Roanoke,
and Elizabeth B. Carroll, Career Law Clerk
I.
INTRODUCTION
T
he
magnitude
of
Congressional intent to
effect major change in the
operation of the bankruptcy system
may be illustrated in the most basic
terms by a comparison of the length
of the Bankruptcy Code before and
after the adoption of the
Bankruptcy Abuse and Consumer
Protection Act of 2005, commonly
designated as “BAPCPA.” The
2005 edition of Norton’s Quick
Reference Pamphlet sets forth the
provisions of the Code in 161 pages
while the 2006 edition incorporating the BAPCPA amendments does
so in 251 pages. That represents an
expansion of approximately 60% in
the length of the Code. Whether
the quality of the Code and the system it governs has been improved
thereby to a like extent is not so
easily demonstrated. This expansion in the length of the Code generally is reflected in the provisions
of Code section 524 governing reaffirmation agreements in particular,
increasing from two relatively com-
pact subsections (c & d) containing
54 lines (about one page) to a total
of five subsections (c, d, k, l & m)
comprising in the aggregate nearly
six full pages. This additional language has not only added very
detailed provisions concerning the
form and necessary provisions of
reaffirmation agreements, but also
has introduced a difference in treatment of such agreements with credit unions as contrasted with all
other creditors holding claims
against bankruptcy debtors. This
article will first summarize preBAPCPA law within the Fourth
Circuit concerning reaffirmation
agreements and then will examine
the current statutory provisions.
II. PRIOR LAW GOVERNING
REAFFIRMATION
AGREEMENTS, INCLUDING THE
“RIDE-THROUGH” OPTION
A bankruptcy debtor having
consumer debts that are secured by
property of the estate has been, and
continues to be, required under §
521(2)(A) of the Code to file a
statement of intention with the
court indicating whether he wishes
to retain, surrender, or redeem such
property. The Court of Appeals for
the Fourth Circuit has held that §
521(2)(A) was enacted to provide
notice to creditors of what a debtor
with secured debt intended to do
with the collateral, but not to limit
the debtor to the three options
specified in that section of surrenContinued on page 2
Contents
Reaffirmation Agreements Under
BAPCPA . . . . . . . . . . . . . . . . . . . . . . . .1
by William F. Stone, Jr. and Elizabeth B. Carroll
Message from the Editor . . . . . . . . . . .3
by Robert S. Westermann
Message from the Chair . . . . . . . . . . . .5
by Pete Zemanian
C. E. Thurston & Sons, Inc.: A Traditional
Reorganization for an Insulation
Contractor Overwhelmed with Asbestos
Litigation . . . . . . . . . . . . . . . . . . . . . .10
by Frank J. Santoro, Ann B. Brogan, and
John M. Ryan
Section Update: Website . . . . . . . . . .15
Clerk’s Corner . . . . . . . . . . . . . . . . . . .16
by Carol Rickerson
Section Update: CLE Programs . . . . . .16
Case Summaries . . . . . . . . . . . . . . . . .17
Virginia State Bar Bankruptcy Law
Section 2006-2007 Board of
Governors . . . . . . . . . . . . . . . . . . . . . .27
Winter 2007
BAPCPA
Continued from page 1
der, redeem, or reaffirm.1 Rather,
prior to the enactment of BAPCPA, debtors within the Fourth
Circuit had four options regarding
treatment of property that is collateral for a secured claim: surrender
the collateral, redeem the collateral, reaffirm the debt, or retain the
collateral while continuing to make
regular payments to the secured
creditor (often called the “ridethrough”, “pay and ride”, or
“fourth” option). While this article
focuses on reaffirmation agreements, it will also touch on the issue
of whether the “ride-through”
option is still available to debtors
after the enactment of BAPCPA.
The enforceability of a reaffirmation agreement is governed by 11
U.S.C. § 524. Prior to BAPCPA, §
524(c) provided that, to be enforceable, the reaffirmation agreement
had to be filed with the court, be
made prior to the discharge, and
contain a clear and conspicuous
statement that the debtor could
rescind the agreement at any time
prior to discharge or within sixty
days after the agreement was filed
with the court, whichever was later,
and that making such an agreement
was not required of the debtor by
any applicable law or agreement. If
an attorney represented the debtor
during the course of negotiating
such agreement, a declaration or
affidavit by the attorney also had to
be filed stating that the agreement
represented a fully informed and
voluntary agreement by the debtor,
did not impose an undue hardship
on the debtor, and that the attorney
had fully advised the debtor of the
Page 2
Volume XXIII, No. 1
legal effects and consequences of
the agreement and any default
thereunder.2 If the debtor was not
represented by an attorney during
the course of negotiating such an
agreement, the court was obliged to
hold a hearing to advise the debtor
that making such an agreement was
not required and of the potential
consequences of doing so, and
determine if the proposed agreement would impose an undue hardship on the debtor or was contrary
to the debtor’s best interest. No
court approval was required, however, if the debtor wanted to reaffirm a debt which was secured in
whole or in part by real property.3
III. SUMMARY OF BAPCPA
AMENDMENTS
AFFECTING
REAFFIRMATION
AGREEMENTS
BAPCPA amended the provisions of § 524 with respect to reaffirmation agreements for consumer
debts in cases filed on or after
October 17, 2005. The previous
requirement of § 524(c)(2) of a
clear and conspicuous statement
that the debtor could rescind the
agreement and had no obligation to
enter into the agreement was
replaced with enhanced disclosure
requirements. Debtors must now
receive certain disclosures as set
forth in new subsection (k) at or
before the time when the debtor
signs the agreement.4 Subsection
(k) sets out in great detail the
mandatory components of a reaffirmation agreement, which must be
filed with the court. Disclosures are
to be made clearly and conspicuously in writing and contain specific
information. These disclosures
include, but are not limited to, the
amount to be reaffirmed, the annual percentage rate, the repayment
schedule, certain instructions, and
notice to the debtor regarding reaffirmation and the right to rescind.5
If a creditor does not provide the
debtor with the required disclosures
under subsection (k) within the
appropriate time frame, the reaffirmation agreement will not be
approved by the court.6
Under subsection (k), the
required form of the reaffirmation
agreement contains six parts. The
Administrative Office of the
United States Courts has made
available a form agreement, denominated as Bankruptcy Form 240A,
which is nine pages in length, in
conformity with the provisions of
the amended statute. This form can
be accessed from the websites of the
Eastern and Western District of
Virginia Bankruptcy Courts under
the local forms link for the Western
District and bankruptcy forms link
for the Eastern District. Part A
consists of mandatory disclosures,
instructions, and notice to the
debtor.7 Part B is the actual reaffirmation agreement between the
debtor and the creditor.8 Part C is
the certification by the debtor’s
attorney, if applicable.9 Part D is
the debtor’s statement in support of
the agreement.10 The debtor is
required to state that he believes
the agreement will not impose an
undue hardship and that he can
afford to make the payments
because his monthly income is in
excess of his monthly expenses (at
least in the amount of the required
monthly payment under the agreement). If the requisite surplus of
income over expenses necessary to
make the reaffirmed payment does
Bankruptcy Law News
Volume XXIII, No. 1
not appear to exist, as more particularly discussed below, a presumption
of “undue hardship” arises. The
debtor’s statement also provides the
debtor an opportunity to explain
how he can afford to make the payments required if that presumption
of “undue hardship” has been triggered. Part E is the motion to be
filed if court approval is necessary.11 The last part is the form of
a proposed order which may be used
if the agreement is approved.12 It
appears that Congress intended to
discourage creativity in the drafting
of such agreements in favor of a policy goal of uniformity.
Subsection (l) is a new subsection that allows creditors to accept
payments from a debtor made pursuant to a reaffirmation agreement
both before and after the filing of
such agreement in the bankruptcy
court as long as the creditor believes
in good faith that the agreement is
effective. If a creditor knows, or
should with reasonable diligence
know, that the agreement does not
meet the requirements of an
enforceable reaffirmation, the creditor is not allowed to accept payments from the debtor.13
Subsection (l)(3) provides that the
disclosure requirements contained
in § 524(c)(2) and (k) “shall be satisfied if disclosures required under
those subsections are given in good
faith.” The purpose and effect of
this language are not entirely clear
as it does not excuse the making of
the required disclosures. It may
mean that technical deficiencies in
the disclosures not materially affecting their value to the debtor will be
adequate and may not be used after
the fact to nullify an agreement
Winter 2007
Message from
the Editor
t the time of our last issue,
the brutal August heat was
upon us and we were all
looking forward to cooler days. How
the seasons change in our fair Commonwealth. I hope that
everyone is surviving the cold weather and staying safe on
the streets.
We are fortunate to have two outstanding articles in this
edition: (1) Judge Stone’s article addresses the impact of
BAPCPA on reaffirmation agreements and related issues; and
(2) Frank Santoro’s, Ann Brogan’s, and John Ryan’s (Marcus,
Santoro & Kozak, P.C.) article addresses the Chapter 11 reorganization of Thurston & Sons, an insulation contractor faced
with overwhelming asbestos litigation. I appreciate very much
Judge Stone’s and his law clerk’s time off the bench in preparing and submitting this article.
Other highlights of this edition include: a message from the
Chair of the Section, Pete Zemanian; updates from the
Section on the website and CLE initiatives; the Clerk’s Corner
prepared by Carol Rickerson, the Chief Deputy Clerk of the
Western District; and the case summaries.
Rich Maxwell wanted me to remind our members about
the Fourth Advanced Consumer Bankruptcy Conference to be
held at the Marriott in Short Pump on April 27, 2007.
This edition is my last as Editor in Chief. I have truly
enjoyed serving as Editor for the last two years and seven editions of the Law News, and hope that I have been able to produce an interesting and informative publication for our members. Rick Scott of LeClair Ryan in Roanoke will be assuming
the Editor duties, and I am confident that I am leaving the
position in capable hands. It has been a pleasure serving you,
and I am sure that Rick would appreciate any comments or
suggestions you have about the Law News.
A
Robbie Westermann
Continued on page 4
Bankruptcy Law News
Page 3
Winter 2007
BAPCPA
Continued from page 3
which has been approved by the
debtor’s attorney or the court. The
authors have not found any court
decisions construing this language.
Subsection (m), another new
subsection, applicable with respect
to a reaffirmation agreement with
any creditor other than a credit
union14, creates a presumption that
a reaffirmation agreement imposes
an “undue hardship” on the debtor
if the debtor’s monthly income
(defined as take home pay plus any
other income received) less actual
current monthly expenses (including monthly payments on postbankruptcy debt and other reaffirmation agreements),15 as shown on
the debtor’s completed and signed
statement in support of the agreement, is not sufficient to make the
payments required by the agreement. The court is required to
review the presumption, which may
be rebutted by a written explanation by the debtor of additional
sources of funds to make the payments as agreed upon. If the explanation is sufficient to persuade the
court that the presumption has
been rebutted, it may approve the
agreement without conducting a
hearing.16 This possibility of
approving an agreement without
conducting a hearing appears to
exist only when the debtor has been
represented by counsel during the
course of negotiation of the reaffirmation agreement and such attorney has certified his or her approval
of the agreement notwithstanding
the fact that the excess, if any, of
the debtor’s income over his
expenses as set forth in his supporting statement is insufficient to
Page 4
Volume XXIII, No. 1
cover the periodic payment being
reaffirmed, thereby triggering the
presumption of undue hardship. If
the presumption is not rebutted to
the satisfaction of the court, however, it is obliged to conduct a hearing
after notice to the debtor and the
affected creditor which must be
concluded before entry of the
debtor’s discharge.17
Interim
Federal Rule of Bankruptcy
Procedure 4008 requires that the
debtor’s statement in Part D be
accompanied by a statement of the
total income and total expenses listed on schedules I and J. If there is a
discrepancy between the scheduled
amounts and the amounts included
in the debtor’s statement in support
contained in Part D of the form
required under section 524(k) for
monthly income and expenses, the
accompanying statement shall
include an explanation of any difference. According to the Advisory
Committee Notes, this interim rule
was adopted to help the court evaluate the reaffirmation agreement
for any undue hardship.
IV. ROLE OF DEBTOR’S ATTORNEY
An attorney who represents the
debtor “during the course of negotiating an agreement” under this subsection must comply with specific
requirements. As this Court noted
in its opinion in In re Hoffman,18
there are two possible interpretations of the language regarding a
bankruptcy debtor’s legal representation “during the course of negotiating” a proposed reaffirmation
agreement. One is that the debtor
was not represented by counsel with
specific respect to the actual negotiation, if any, of such agreement.
When the reaffirmation is simply
re-assumption of legal liability for
the existing contract, it is not clear
what actual “negotiation” there
might be in such a process. The
other interpretation is that the
debtor was not represented by counsel during the time that such agreement was made. In the Hoffman
case, this Court did hold a hearing
and ruled upon the debtors’ desire
to reaffirm a car loan although the
debtors were represented by bankruptcy counsel at the time such
agreement was made, but expressly
noted in its decision that it did not
intend to establish precedent on
such issue when no argument thereon had been presented. It does
appear that Congress intended to
require a debtor’s counsel to sign a
certification approving a reaffirmation agreement only when he or she
was actually involved in the negotiation of such agreement. The form
prescribed in § 524(k)(7) for a
motion seeking court approval of an
agreement contains the statement,
“I am not represented by an attorney in connection with this reaffirmation agreement.”(underlining
added) In addition, the statement
required by § 524(k)(3)(I) to be
contained in the disclosure statement accompanying the reaffirmation agreement, states, in part, as
follows:
If you have questions about
your reaffirming a debt or what
the law requires, consult with
the attorney who helped you
negotiate this agreement reaffirming a debt. If you don’t
have an attorney helping you,
the judge will explain the effect
Continued on page 6
Bankruptcy Law News
Volume XXIII, No. 1
Winter 2007
Message from
the Chair of the Section
B
aby steps, by definition, are small. But not from the perspective
of the baby.
The Bankruptcy Section of the Virginia State Bar is in the
process of taking two baby steps into the electronic “flat” world of the
21st century. For those who can text message, these steps may seem
small. Those of us with less electronic savvy, however, are not so sure.
Step No. 1 – Electronic Seminars: For the past two decades,
this section has sponsored an annual “basics” program, presented live
in four locations around the state. Not this year. The flood of programs during the past two years discussing the impact of the BAPCPA
on our area of practice has (in our assessment) saturated the market, at least temporarily, for
any live “basics” program. We have responded by instead instituting a multi-part series of audio
seminars, beginning in late March. Please look elsewhere in this newsletter for further details.
Under the capable leadership of Jim Schroll, Virginia CLE will present telephone and on-line
discussions by experts in the topics of debt relief agency requirements, means testing and
exemptions, chapter 13 issues, reaffirmation and redemption, and a tour through the provisions
of Chapter 11 of the Bankruptcy Code. Practitioners will have the option to participate in all
or just select one or more of these programs.
Step No. 2 – Internet Communications: Our section is simultaneously taking another
baby step towards interactive communication with section members. Bob Copeland and Lynn
Tavenner are heading up the effort to enable section announcements to be communicated electronically to our membership. This (perhaps) will be followed by regular dissemination of
selected bankruptcy court opinions issued by our Eastern District and Western District judges.
Ultimately, we may move to delivery of this newsletter in an electronic format, and will consider the possibility of hosting listserve dialogues.
These initiatives are intended to enhance the ability of our section to serve its members.
Your comments are always welcome, electronically of course – [email protected].
Pete Zemanian
2006-2007 Chair
Bankruptcy Law News
Page 5
Winter 2007
BAPCPA
Continued from page 4
of your reaffirming a debt when
the hearing on the reaffirmation agreement is held.
Judge Small held a hearing in the
Donald case, infra, and approved the
reaffirmation agreement even
though the debtors were represented by counsel in their bankruptcy
case, although not in the negotiation of the reaffirmation agreement.
Judge Funk of the Bankruptcy
Court for the Middle District of
Florida has held that Congress did
not intend for judges to review such
agreements when the debtor was
represented by an attorney and
denied the creditor’s request for a
hearing on two agreements, but in
that case the debtors’ attorney had
attested that no presumption of
undue hardship existed although
the supporting documentation
showed insufficient income to make
the reaffirmed payments.19
If an attorney represents the
debtor during the course of negotiating a reaffirmation agreement
(both pre-and post-BAPCPA), a
declaration or affidavit must be
signed by the attorney stating that
such agreement represents a fully
informed and voluntary agreement
by the debtor, that such agreement
does not impose an undue hardship
on the debtor or dependent of the
debtor, and that the attorney fully
advised the debtor of the legal effect
and consequences of such an agreement and any default thereof.20
Under BAPCPA, the attorney must
also sign the certification in Part C
of the disclosure statement to this
effect. The reaffirmation agree-
Page 6
Volume XXIII, No. 1
ment so certified by debtor’s counsel
is effective upon filing with the
court and court review is unnecessary, unless the reaffirmation is presumed to be an “undue hardship”. If
a presumption of undue hardship
arises, the attorney must also certify
that, in his or her opinion, the
debtor is capable of making the payments required by the agreement.21
As discussed previously, this presumption arises when the debtor
does not have sufficient funds,
according to his represented income
and other living expenses, to make
the required payments. If the reaffirmation agreement does not contain the attorney’s certification, the
agreement is not enforceable unless
there is also a motion for court
approval, in which case a hearing
will be scheduled.22
V. COURT’S
ROLE
TO
APPROVE OR DISAPPROVE
AGREEMENTS WHERE
DEBTOR NOT REPRESENTED
BY ATTORNEY “DURING THE
NEGOTIATION”
O
R
WHEN PRESUMPTION OF
“UNDUE HARDSHIP” ARISES
If the debtor was not represented by an attorney during the course
of negotiating such an agreement
and the debt to be reaffirmed is not
based in whole or in part on a consumer debt secured by real property,23 the court must hold a hearing
to determine that the proposed
agreement will not impose an
undue hardship on the debtor and is
in the debtor’s best interest.24 At
such hearing, the court must inform
the debtor that such agreement is
not required and the legal effect and
consequences of the agreement and
default thereof.25 The debtor must
also sign Part E of the disclosure
statement requesting approval of
the agreement and stating that he
was not represented by an attorney
in connection with the agreement,
and that the agreement is in his best
interest.26
As noted in the immediately
preceding section of this article, the
court is also required to review reaffirmation agreements with creditors
other than credit unions even when
the debtor has been represented by
counsel in the negotiation of the
reaffirmation agreement when the
presumption of “undue hardship”
arises under § 524(m).
VI. SPECIAL RULE FOR REAFFIRMATION
AGREEMENTS
WITH CREDIT UNIONS
Where the creditor is a credit
union and the debtor is represented
by an attorney, the debtor must
confirm in writing and sign that he
believes the agreement is in his
financial interest, that he can afford
to make the required payments, and
that he received a copy of the
Reaffirmation Disclosure Statement
and a completed and signed reaffirmation agreement.27 The debtor
is not required to state that the
agreement does not impose an
undue hardship nor is the debtor
required to provide his monthly
income and expense figures. The
debtor’s attorney is not required to
make any certification that in his
opinion the debtor is able to make
the required payments.28 This does
not relieve counsel, however, from
the obligation to certify that:
(1)this agreement represents a
fully informed and voluntary
agreement by the debtor; (2)
Bankruptcy Law News
Volume XXIII, No. 1
Winter 2007
this agreement does not impose
an undue hardship on the
debtor or any dependent of the
debtor; and (3) I have fully
advised the debtor of the legal
effect and consequences of this
agreement and any default
under this agreement.
an attorney during the negotiation
of a reaffirmation agreement with a
credit union, the agreement
becomes effective upon filing with
the court. One can only admire, if
not envy, the evident esteem in
which credit unions collectively are
held in Congress.
11 U.S.C. § 524(k)(5)(A). There
does seem to be an internal conflict
or ambiguity at least with respect to
the
question
of
“undue
hardship”and “presumption of
undue hardship” for agreements
with credit unions. Subsection (m)
regarding the presumption of undue
hardship also does not apply if the
creditor is a credit union.29 Under
the BAPCPA added provisions,
there is no “presumption of undue
hardship” which arises in credit
union agreements when the debtor’s
income is inadequate to cover all of
his budgeted expenses plus the reaffirmed payment. Nevertheless, the
exemption of credit union agreements from the “presumption of
undue hardship” does not remove
such agreements from the former
and continuing requirements under
§ 524(c)(6)(A) and (d) that the
attorney who has assisted the debtor
in the negotiation of the agreement,
or if none, the court, must make a
determination that such agreement
does not impose “an undue hardship
on the debtor or a dependent of the
debtor.” How counsel or the court
might be comfortable in making
such a determination when the
debtor’s reported budget figures do
not allow for enough margin to
cover a reaffirmed payment,
whether to a credit union or any
other creditor, is not readily apparent. If the debtor is represented by
VII.
STATUS
OF
“RIDETHROUGH” OPTION
As mentioned previously, prior
to the enactment of BAPCPA,
debtors in the Fourth Circuit had
four options regarding treatment of
property that is collateral for a
secured claim: surrender, redeem,
reaffirm, or retain the collateral
while continuing to make regular
payments to the secured creditor.
Judge Small of the Bankruptcy
Court for the Eastern District of
North Carolina has recently held
that this fourth option, the “ridethrough” option, is no longer available to debtors following enactment
of BAPCPA, a holding consistent
with the general understanding of
Congressional intent on this issue.
In In re Donald,30 the debtors
entered into a reaffirmation agreement with a creditor regarding a
vehicle, but argued that they could
retain the vehicle by keeping their
payments current, without reaffirming the debt. After an extensive
review of relevant statutes both preand post-BAPCPA, Judge Small
held that bankruptcy debtors no
longer have the option, postBAPCPA, to retain the collateral
while remaining current on their
payments to the creditor.31 The
reaffirmation agreement, however,
was approved as it was in the best
interest of the debtors and did not
cause any undue hardship. In his
Bankruptcy Law News
review of the BAPCPA amendments, Judge Small noted that trying to unravel the statutory “puzzle
is like trying to solve a Rubik’s Cube
that arrived with a manufacturer’s
defect.”32 The debtors argued that
they could avoid all the consequences arising from §§ 362(h),
521(a)(6), and 521(d) by executing
a reaffirmation agreement, even in
circumstances where the agreement
is unenforceable and that the consequences arising from these sections
are triggered upon a debtor’s failure
to enter into the agreement, not by
the court’s disapproval of the agreement. Judge Small noted that the
debtors’ argument may prevail in
some circumstances, such as when
the reaffirmation agreement is not
enforceable due to the bankruptcy
court’s refusal to approve it or failure
of the creditor to comply with the
requirements of section 524(c),
something beyond the debtor’s control.
A California bankruptcy court
held that a reaffirmation agreement
was unenforceable due to the creditor’s failure to comply with the disclosure requirements of § 524(k)
and, therefore, prohibited the creditor from repossessing the vehicle.33
That court noted that Congress
could not have intended to give a
secured creditor the power to thwart
a chapter 7 debtor’s attempt to
retain the collateral and reaffirm
the debt by failing to comply with
the disclosure requirements of §
524(c)(2) and (k).
In In re
34
Hinson, a chapter 7 debtor moved
to hold a lender in contempt for
refusing to enter into a reaffirmation agreement on the same terms
as set forth in the original agreeContinued on page 8
Page 7
Winter 2007
BAPCPA
Continued from page 7
ment between the parties and for
insisting that the debtor, despite
remaining current on her car loan
payments, pay the lender’s attorney’s fees pursuant to an ipso facto
clause in the contract. Judge
Leonard held that the debtor complied with § 362(h)(1) by timely filing her statement of intention to
reaffirm the debt and by timely taking action to enter the reaffirmation
agreement on its original terms.
The debtor agreed to the terms of
the reaffirmation agreement that
included the original terms of the
contract, but would not agree to pay
the lender’s attorney’s fees. The
court noted that reaffirmation
remains a matter of contract and
the lender may insist on terms additional to those in the original contract. “But having chosen to do so
here in the case of a debtor who has
always been current with her payments,” the lender “must live with
the consequences if the debtor
declines to reaffirm” on the lender’s
“terms but desires to continue with
the original agreement.”35 As the
debtor timely agreed to reaffirm the
debt on the original terms of the
contract, the automatic stay was not
terminated and the lender could
not enforce the ipso facto clause of
the contract.
In reality, whether the “ridethrough” option survives BAPCPA
or not may not make much practical difference in most cases. Even if
the debtor’s counsel or the court
refuses to certify or approve, as
applicable, a particular reaffirmation agreement, and even if such
fact results in the secured creditor
being entitled to enforce a bankPage 8
Volume XXIII, No. 1
ruptcy filing default provision contained in the loan contract, section
524(f) specifically allows debtors to
continue making voluntary payments to creditors and the latter to
accept them. Creditors generally
prefer payment to repossession and
as long as the debtor is current on
his payments, the secured creditor
will likely prefer in the ordinary situation to continue to accept such
payments rather than face the alternative. The “ride-through” option
is only meaningful when the debtor
is and remains current upon his payment obligation to the secured
creditor, and the business rationale
for declaring a default in a contract
where the debtor is current on the
payments due under the contract
seems doubtful except in extreme
circumstances, such as, perhaps,
rapidly depreciating collateral or a
customer in whom the creditor has
lost all confidence. A creditor may
well decide that it is in its own best
interest to permit debtors to continue making the required payments on the loan, which continues to be secured by collateral even
if worth less than its loan balance,
while maintaining its right to
repossess in the event the payments cease and, if applicable, any
existing contractual claims it may
have against any co-obligors.
VIII.
WHAT
HASN’T
CHANGED
BAPCPA has not changed the
requirement that reaffirmation
agreements must be made prior to
the granting of the discharge.36 It
is not uncommon for bankruptcy
courts to be confronted with
motions to approve reaffirmation
agreements although the debtor has
already received a discharge before
the agreement has been made or
even to rescind a discharge which
has already been granted to permit
the debtor to reaffirm some desired
obligation after which a new discharge would be entered. Such
requests are clearly contrary to the
plain words of the statute and have
been denied.37 The debtor’s attorney who has represented the debtor
in the negotiation of a reaffirmation
agreement is still required to file
with the court a declaration or affidavit that states that the agreement
represents a fully informed and voluntary agreement by the debtor,
that such agreement does not
impose an undue hardship on the
debtor or dependent of the debtor,
and that the attorney fully advised
the debtor of the legal effect and
consequences of the agreement and
default thereof.38 This obligation
continues to exist with respect to all
reaffirmation agreements, including
those with credit unions. The
debtor still has the right to rescind
the agreement at any time prior to
discharge or within sixty days after
such agreement is filed with the
court, whichever is later.39
IX. CONCLUSION
The extensive amendments to
section 524 concerning reaffirmation agreements are an example of
the “consumer protection” portion
of BAPCPA’s full title, although
that protection is somewhat
watered down in the case of agreements between bankruptcy debtors
and credit unions. Debtors must be
supplied by the creditors with specific disclosures informing them of
the cost and the liability which they
are agreeing to reaffirm. If a crediBankruptcy Law News
Volume XXIII, No. 1
tor fails to provide such disclosures,
the agreements are unenforceable
against the customer. If the debtor’s
budget information discloses a deficiency of funds needed to make the
reaffirmed payment, the debtor
must be able to demonstrate that
nevertheless such payments can be
made without precipitating financial distress. Whether the amount
of the information required is so
great that bankruptcy debtors will
be overwhelmed and not in actual
practice make intelligent and
informed financial decisions regarding reaffirming debts remains to be
determined. In any event, debtors’
counsel and, where indicated,
bankruptcy courts continue to
have a weighty responsibility to
make sure that debtors clearly
understand the consequences of
what they are doing and apparently can afford to do so. v
1. See In re Belanger, 118 B.R. 368, 370
(Bankr. E.D. N.C. 1990), aff’d, 962 F.2d
345, 347-48 (4th Cir. 1992).
2. 11 U.S.C. § 524(c)(3).
3. 11 U.S.C. § 524(c)(6)(B) and (d)(2).
4. 11 U.S.C. § 524(c)(2).
5. 11 U.S.C. § 524(k)(2).
6. In re Quintero, No. 06-40163 TK,
2006 Bankr. LEXIS 906 (Bankr. N.D. Ca.
May 5, 2006).
7. 11 U.S.C. § 524(k)(3).
8. 11 U.S.C. § 524(k)(4).
9. 11 U.S.C. § 524(k)(5).
10. 11 U.S.C. § 524(k)(6).
11. 11 U.S.C. § 524(k)(7).
12. 11 U.S.C. § 524(k)(8).
13. See generally 4 Collier on
Bankruptcy § 524.10 at p. 524-57 (Alan
N. Resnick & Henry J. Sommer eds.,
15th ed. rev.).
14. 11 U.S.C. § 524(m)(2).
15. 11 U.S.C. § 524(k)(6)(A).
16. The statutory language requires the
court to review the reaffirmation agreement when the presumption of undue
Bankruptcy Law News
Winter 2007
hardship arises and provides that it may
not “disapprove” the agreement without conducting a hearing. It does not
expressly state that the court is to
approve the reaffirmation agreement if
the presumption of undue hardship has
been satisfactorily rebutted in the court’s
determination. That may be the reason
that the newest form of suggested order
provided by the Administrative Office in
January, 2007 for use with Form 240A
contains as alternative dispositions with
respect to § 524(m)(1), “The court does
not disapprove the reaffirmation agreement under 11 U.S.C. § 524(m)”, and
“The court disapproves the reaffirmation
agreement under § 524(m)”, but does
not include “The court approves the
reaffirmation agreement under §
524(m)”.
17. 11 U.S.C. § 524(m)(1).
18. No. 06-70231 (U.S. Bankr. W.D. Va.
Aug. 20, 2006).
19. In re Calabrese, No. 06-02121-3P7,
2006 Bankr. LEXIS 3108 (Bankr. M. Fla.
Nov. 13, 2006).
20. 11 U.S.C. § 524(c)(3).
21. 11 U.S.C. § 524(k)(5)(B).
22. In re Donald, 343 B.R. 524, 527
(Bankr. E.D. N.C. 2006).
23. The requirement that the court find
the agreement to be in the best interest
of the debtor and that it does not
impose an undue hardship on the debtor
is not applicable if the debt to be reaffirmed is a consumer debt secured by
real property. 11 U.S.C. § 524(c)(6)(B).
In re Bauer, No. 97-13034-SSM, 1997
Bankr. LEXIS 2090 (Bankr. E.D. Va. Nov.
12, 1997)(Citing other cases, the Bauer
court notes: “It is clear that the policy
underlying this provision is to remove
from court oversight a pro se debtor’s
personal decision that reaffirming a
mortgage debt is in the debtor’s best
interest and will not interfere with his or
her ‘fresh start.’”).
24. 11 U.S.C. § 524(c)(6)(A).
25. 11 U.S.C. § 524(d)(1).
26. 11 U.S.C. § 524(k)(7).
27. 11 U.S.C. § 524(k)(6)(B).
28. 11 U.S.C. § 524(k)(5)(C).
29. 11 U.S.C. § 524(m)(2).
30. 343 B.R. 524. See also In re
Quintero, No. 06-40163 TK, 2006 Bankr.
LEXIS 906 (Bankr. N.D. Ca. May 5,
2006).
31. 343 B.R. at 539-540.
32. Id. at 529.
33. In re Quintero, No. 06-40163 TK,
2006 Bankr. LEXIS 906 (Bankr. N.D. Ca.
May 5, 2006).
34. 352 B.R. 48 (Bankr. E.D.N.C. 2006).
35. Id. at 52.
36. 11 U.S.C. § 524(c)(1).
37. In re Graham, 297 B.R. 695, 699
(Bankr. E.D. Tenn. 2003). See also 4
Collier on Bankruptcy § 524.04[1] at p.
524-37 (Alan N. Resnick & Henry J.
Sommer eds., 15th ed. rev.); In re
Abshire, No. 7-03-01475-WSR (Bankr.
W.D. Va. Oct. 17, 2003); In re Stewart,
__ B.R. __, 2006 WL 3064089 (Bankr.
N.D. Ohio Oct. 26, 2006).
38. 11 U.S.C. § 524(c)(3).
39. 11 U.S.C. § 524(c)(4).
Page 9
Winter 2007
Volume XXIII, No. 1
C. E. Thurston & Sons, Inc.:
A Traditional
Reorganization for an
Insulation Contractor
Overwhelmed with
Asbestos Litigation
Clockwise:
Frank J. Santoro,
Ann B. Brogan,
and
John M. Ryan
by Frank J. Santoro, Ann B. Brogan, and John M. Ryan
I. INTRODUCTION
AND
BACKGROUND
n 2002, unable to escape from
decades of asbestos mass tort litigation, C. E. Thurston and
Sons, Inc. (“Thurston”) visited the
law firm of Marcus, Santoro &
Kozak, P.C. in Chesapeake,
Virginia (“MS&K”), seeking a permanent solution to the myriad
issues spawned from the continuing onslaught of asbestos related
personal injury claims. On August
18, 2003, Thurston became the
first debtor in the history of the
Bankruptcy Court for the Norfolk
Division of the Eastern District of
Virginia to file a voluntary petition
for relief under Chapter 11 of the
Bankruptcy Code with the express
purpose of obtaining relief from
present and future asbestos related
claims in accordance with the provisions of Section 524(g) of the
Bankruptcy Code. On March 30,
2006, the United States District
Court for the Eastern District of
Virginia confirmed a traditional
leveraged reorganization plan for
Thurston that permitted management to retain significant ownership and control and provided for
the issuance of an injunction, pur-
I
[NOTE FROM EDITOR: This
article ran in the Mealey’s Asbestos
Bankruptcy Report.]
Page 10
suant to Section 524(g), that
channeled present and future
environmental and other asbestos
related claims and demands to a
single trust.
Founded in 1919 and headquartered in Norfolk, Virginia,
Thurston is a closely held commercial, industrial, and marine contractor serving the maritime,
power, and other heavy industry in
the mid-Atlantic.
For years,
Thurston’s core business consisted
of contracting for the installation,
maintenance, repair, and removal
of insulating materials manufactured by others, as well as the sale
and distribution of insulation
materials. Thurston had ceased
the sale and installation of asbestos
containing products by the late
1970s. Thurston never manufactured insulation products nor
engaged in the mining or other
extraction of raw materials. As it
entered the twenty-first century,
Thurston’s streamlined management fostered the company reputation as a productive and profitable
business focused on job safety,
excellence in customer satisfaction, and employee motivation. In
2002, Thurston exited the distribution business and focused its business on insulation contracting.
Thurston had become a regular
target of many lawsuits and, like
others in the insulation industry,
was battered by tens of thousands
of asbestos related personal injury
claims. Despite Thurston’s best
efforts to manage its asbestos problem in a manner that was fair to
those who were legitimately
harmed by asbestos products, the
crescendo of claims against
Thurston made it impossible for
Thurston to continue to address its
asbestos caseload without bankruptcy protection and the permanent injunction offered by Section
524(g) of the Bankruptcy Code.
Section 524(g) establishes a
method for giving debtors relief
from all present as well as future
asbestos claims by providing for the
issuance of a supplemental injunction that shields debtors from all
asbestos related actions upon confirmation of a plan of reorganization under Chapter 11.
accountants,
Thurston’s
Sullivan, Andrews & Taylor, P.C.
of Virginia Beach, Virginia,
referred the company to MS&K.
Despite MS&K’s bankruptcy and
restructuring experience, including
debtor representation in other
asbestos-related
bankruptcies,
MS&K had yet to develop a plan
of reorganization for a business
plagued by asbestos litigation.
Beginning in late 2002, Frank
Santoro agreed to prepare and
Bankruptcy Law News
Volume XXIII, No. 1
negotiate the terms of a Chapter
11 plan of reorganization for
Thurston. Santoro put together a
team to research and review
Thurston’s strengths, financial situation, and history of asbestos and
environmental claims and to
develop a plan of reorganization
that complied with the requirements of Section 524(g).
Prior to working with MS&K,
Thurston’s efforts to manage its
many asbestos personal injury
claims over the years by settling
them had opened a Pandora’s Box,
with each resolution creating a
new set of issues for the company.
Like many asbestos claim defendants, Thurston had entered into
numerous settlement agreements
and other ill-fated mechanisms
designed to meet and stem the flow
of claims. For instance, in 1985,
Thurston, along other former manufacturers, sellers, or installers of
asbestos-containing
products,
entered into an agreement with
certain insurers, known as the
Wellington Agreement.
The
Wellington Agreement was perceived to be an efficient means of
managing insurance resources and
the defense and payment of
asbestos personal injury claims.
While the agreement included
valuable administrative provisions,
including a mandatory alternative
dispute resolution process for insurance coverage disputes, the magnitude of claims and other factors
caused the collective funding
aspect of the agreement to fail.
Thereafter, in 1988, Thurston
became a member of the Center for
Claims Resolution (“CCR”), an
outgrowth of the Wellington
Agreement. The CCR was similar
to the Wellington concept not
only in its fundamental purpose of
dealing with asbestos claims by
facilitating large multi-claimant
and multi-defendant settlements,
Bankruptcy Law News
Winter 2007
but also in its failure to achieve
that purpose in any lasting manner,
given the continuous torrent of
claims. The CCR stopped settling
asbestos bodily injury claims for
Thurston in or about 2001.
Thurston paid its share of settlements, defense costs, and
claims-handling charges from
operations or the proceeds of its
various comprehensive general liability insurance policies. Thurston
and many of its insurers settled
coverage disputes for the majority
of Thurston’s primary and excess
policies that addressed asbestos
related bodily injury claims. For
the most part, the insurers agreed
to make lump-sum payments
which Thurston used to defray its
costs and expenses associated with
the asbestos litigation. The only
significant insurance disputes
Thurston did not pursue originally
were claims under policies issued
by Certain Underwriters at Lloyd’s,
London (“Lloyd’s”) and the Zurich
American Insurance Companies
(“Zurich”), signatories to the
Wellington Agreement. Thurston
had been unable to find counsel
willing to pursue these claims on
cost effective terms.
Thurston’s attempts to manage
and resolve the asbestos tort claims
subjected it to additional claims
and issues based on other legal theories, such as (a) contribution
claims asserted by third parties also
defending various asbestos-related
personal injury claims; (b) claims
for the costs of defending and managing the personal injury litigation;
and (c) the disputes over insurance
coverage. In addition, personal
injury claims that Thurston
thought were settled through
Wellington, CCR, and other
multi-party settlements re-emerged
as contractual claims to enforce
full payment of tort settlement
agreements that were not fully
funded due to co-defendants’
bankruptcies.
As the presence of asbestos
became less desirable, many customers turned to Thurston for
removal and disposal of asbestoscontaining insulation.
As
Thurston developed a specialty in
asbestos abatement, it also was
exposed to potential new claims for
property damage and environmental claims due to the presence of
asbestos in the insulation that
Thurston either installed or
removed. When engaged in abatement or “ripout” activities,
Thurston disposed the asbestoscontaining material at fully
licensed waste disposal sites after
having obtained the necessary permits to do so. Despite Thurston’s
strict adherence to environmental
regulations and disposal of asbestos
containing products, the United
States Environmental Protection
Agency named Thurston, along
with several other companies who
used the facility, as a potentially
responsible party (“PRP”) for
groundwater leachate damages at a
Virginia landfill, which the EPA
designated a Superfund site under
the
Comprehensive
Environmental
Response,
Compensation and Liability Act
(CERCLA). Thurston’s disposal
of asbestos waste was not a contributing factor to the groundwater contamination and Thurston
did not believe any allocation of
remediation liability associated
with the landfill could result in
significant liability; however, in
light of the PRP designation,
Thurston was concerned its
asbestos abatement activities and
related waste disposal in several
other states could expose it to
other environmental issues.
About the time Thurston
decided to file for Chapter 11
Continued on page 12
Page 11
Winter 2007
C. E. Thurston & Sons, Inc.
Continued from page 11
relief, Thurston was named as a
defendant in lawsuits claiming
damages from disease caused by
exposure to or presence of not only
asbestos, but also ceramic fibers,
silicates, “mixed dust”, and other
substances commonly encountered
during the course of insulation
sales or contracting activities. In
addition, the insulation industry as
a whole began to experience a rise
in personal injury claims allegedly
caused by exposure to substances
containing silica.
Thurston
became concerned that, due to the
nature of its insulation sales and
contracting activities, the same
conduct or events that led to huge
numbers of asbestos-related claims
against Thurston would expose
Thurston to other mass demands
for damages related to or allegedly
caused by the presence of other
substances used in Thurston’s insulation
contracting
business.
Thurston did not want to undergo
reorganization in bankruptcy only
to emerge to face new “flavor of
the month” mass tort claims that
arose out of the same activity that
caused the asbestos claims.
From discussions with others in the
insulation industry with asbestos
issues, Thurston’s management
favored filing a Chapter 11 bankruptcy case with a “pre-packaged”
plan of reorganization to resolve
existing asbestos claims; however,
MS&K’s attorneys were not convinced a pre-pack plan was the best
method for efficiently and costeffectively achieving confirmation
of a plan to address Thurston’s
asbestos related issues. Unlike
many other businesses with
asbestos issues that had attempted
pre-packs, Thurston had already
resolved most of its insurance coverage issues and exhausted most of
its insurance assets, leaving little
Page 12
Volume XXIII, No. 1
room for negotiation of the
amount of Thurston’s contribution
to any trust. In addition, Thurston
was adamant that it would liquidate its business rather than face
new claims after bankruptcy arising out of its asbestos abatement
work, including personal injury
claims due to exposure to other
toxic materials or potential environmental claims arising out of
Thurston’s disposal of asbestoscontaining products.
MS&K’s attorneys concluded
the likelihood was small of successfully negotiating a pre-pack plan
that would provide Thurston needed relief from claims defined more
broadly than just personal injury
claims due to exposure to asbestos
and also meet the due process
requirements of the Bankruptcy
Code. Also, MS&K knew that
Thurston would file its bankruptcy
petition in the Norfolk Division of
the Eastern District of Virginia, a
court known for moving cases
along quickly. MS&K recommended that Thurston not spend
time and resources engaging in
futile pre-petition negotiations,
but instead develop a plan of reorganization before filing its bankruptcy petition and initiate negotiations only after commencement
of the bankruptcy case and the
appointment of an Official
Committee of Asbestos Claimants
and Future’s Representative.
II. THE PLAN OF REORGANIZATION
Based on a close reading and
detailed analysis of the statutory
provisions of Section 524(g), as
well as the plans, disclosure statements, and case law for a number
of companies with asbestos issues
that have emerged from Chapter
11, MS&K drafted a plan of reorganization for consideration which
was in many ways a traditional
leveraged reorganization with
claimants paid out of future cash
flow. The plan was based on the
overriding objective to channel
every liability, as well as every
asset, that was in any way related
to Thurston’s history of engaging
in business related to the purported “presence of, or exposure to,
asbestos or asbestos-containing
products,” to a trust for resolution. Essential components of the
plan were:
(a) broad definitions of
“Asbestos Related Claims” and
“Asbestos Related Demands” to
include not only personal injury
claims but any sort of claim or
demand against Thurston,
under any theory of law, that in
was in any way related to any of
Thurston’s pre-petition activities concerning asbestos or
asbestos-containing products
and resulting claims;
(b) Thurston’s contribution
to a trust the assets Thurston
had acquired due to its history
of engaging in business related
to the presence of asbestos or
asbestos containing products,
including (i) the value of its
goodwill; (ii) its insurance coverage and any proceeds
obtained for the defense of
claims for damages allegedly
caused by the presence of, or
exposure to, asbestos or asbestos
containing products; and (iii)
all
rights
arising
from
Thurston’s
pre-petition
attempts to manage its asbestos
claims; and
(c) the formation of only one
trust to assume all liability for
and payment of all Asbestos
Related Claims and Demands—
regardless of their nature.
Thurston’s asbestos claims were
defined as broadly as possible in
order to take full advantage of the
scope of injunctive relief provided
Bankruptcy Law News
Volume XXIII, No. 1
in Section 524(g) so as to include
claims that in any way arose out of,
were related to, or “allegedly
caused by the presence of, or exposure to, asbestos or asbestos-containing products,” regardless of
whether the theory of legal liability was based on claims for personal
injury, property damage, environmental clean-up costs, contribution, defense costs, or insurance
coverage disputes. Most of the
Asbestos Related Claims that had
been asserted against Thurston
arose out of or were related to
either Thurston’s insulation sales
and contracting activities or
Thurston’s attempts to resolve such
claims—claims of personal injury,
damage to property, for environmental clean-up costs, for contribution asserted by third parties
likewise
defending
various
asbestos-related personal injury
claims, for defense costs, and based
upon insurance coverage disputes.
“Asbestos Related Demands” were
likewise defined to include all
demands against Thurston that
arise “out of the same or similar
conduct or events that gave rise to”
the Asbestos Related Claims, such
as Thurston’s activities of selling,
installing, removing, and disposing
of asbestos and asbestos containing
products. Specifically included in
the definition were demands that
were alleged to be in any way related to the “presence, existence,
inhalation or ingestion of, exposure to or contact with any irritating, carcinogenic or toxic substances/materials/particles or dusts
containing a combination of one
or more such substances/materials/particles.”
Correspondingly, any insurance or other assets that Thurston
had acquired that were in any way
related to asbestos would form the
corpus of any trust used to resolve
asbestos related claims. Unlike
Bankruptcy Law News
Winter 2007
other plans which had employed
the provisions of Section 524(g) by
establishing multiple trusts and
delineating the source of funds
available for payment of separate
types of claims, MS&K designed
Thurston’s plan to limit the costs
of administration by pooling all
available funds into one trust and
maximizing the amount available
for the settlement or satisfaction
of all Asbestos Related Claims
and Demands.
III. THE ROAD TO CONFIRMATION
Within the first six months of
the filing of Thurston’s Chapter 11
bankruptcy case, the United
States Trustee appointed the
Official Creditors’ Committee of
Asbestos
Claimants
(the
“Asbestos Claimants Committee”
or “ACC”) comprised of holders of
Asbestos Related Claims, represented by various counsel who,
collectively, represented a majority of Thurston’s known asbestos
bodily injury claimants. The
ACC retained Campbell &
Levine, LLC, as counsel. The
Pittsburgh firm provided impressive asbestos bankruptcy understanding and experience, including prior representations of committees of bodily injury claimants
in other asbestos bankruptcies.
Richard W. Hudgins, a bankruptcy
attorney in Newport News,
Virginia, was appointed local
counsel to the ACC.
The
bankruptcy
court
approved the appointment of
Jerrold G. Weinberg, Esquire, to
serve as the Future Claimants’
Representative (“FCR”), the official legal representative for the
purpose of protecting the rights of
all persons that might assert
Asbestos Related Demands against
Thurston or other related parties
after confirmation of a plan of reor-
ganization. The Norfolk, Virginia,
law firm of Weinberg & Stein
served as counsel to the Future
Claimants’ Representative. A
debtor is entitled to the broader,
supplemental relief of Section
524(g) only under specified conditions and only if the debtor and the
bankruptcy court closely follow the
detailed procedures set out in the
statute. As Thurston worked to
develop a plan complying with
524(g), Thurston’s counsel asked
the bankruptcy court to clarify that
the FCR had been appointed as the
legal representative for the purpose
of protecting the rights of all persons that might assert demands
that arise out of the same or similar
conduct or events that gave rise to
asbestos-related claims against
Thurston or that are premised on
any other theory of law, equity,
admiralty, or otherwise, and not
just those who may assert asbestos
related bodily injury demands.
The Court granted this request.
No other committees or representatives of the estate, such as a
committee of unsecured creditors
or equity committee, were appointed.
The court did approve
Thurston’s retention of special
counsel for matters specifically
related to asbestos litigation. On
the recommendation of MS&K
and with the approval of the
Bankruptcy Court, Thurston
retained the law firm of Gilbert
Heintz & Randolph LLP (“GHR”),
to advise and assist the Debtor in
pursuing insurance coverage from
Lloyd’s and Zurich. Because of the
success and experience it gained in
prosecuting Thurston’s pre-petition coverage disputes, GHR
agreed, where others refused, to
assist Thurston in bankruptcy on
creative terms the reorganizing
company could afford. In October
2003, Thurston initiated an alterContinued on page 14
Page 13
Winter 2007
C. E. Thurston & Sons, Inc.
Continued from page 13
native dispute resolution proceeding involving these insurers pursuant
to
the
Wellington
Agreement. During an extended
mediation
phase,
Thurston
reached settlements with Lloyd’s
and Zurich that the Bankruptcy
Court approved in February 2006.
Cognizant of the requirement in
11 U.S.C. § 524(g) for seventyfive percent approval by holders of
Asbestos Related Claims of any
plan of reorganization with a
channeling injunction, representatives of the Debtor met on
numerous occasions to develop
consensus with and among the
Asbestos Claimants’ Committee
and the Future Claimants’
Representative for the terms of
Thurston’s plan of reorganization
and exchanged extensive documentation regarding the value of
the Debtor’s business, value of any
insurance policies for which
Thurston had yet to recover, the
merit of CCR related claims and
defenses, Thurston’s pre-petition
settlements, Thurston’s financial
projections, and post-confirmation corporate governance and
ownership. Although the ACC
and the FCR made recommendations for inclusion of certain provisions in any plan they would
support, the ACC and the Future
Claimants’ Representative had
not yet agreed by the fall of 2005
to support the plan Thurston proposed. On December 7, 2005,
Thurston filed its proposed plan
without the explicit support of the
ACC and FCR.
Thurston offered to fund the
single trust with the following
assets:
a) $ 4,450,000 in cash;
b) a $2 million note payable
over five years made by
Thurston in favor of the Trust
Page 14
Volume XXIII, No. 1
and secured by the stock of
Thurston’s two shareholders;
c) issuance to the Trust of all
Thurston’s newly created preferred class of voting stock,
and comprising 25 % of
Thurston’s issued and outstanding capital voting stock,
with a stated value of $1 million and issued pursuant to an
option to sell the Trust’s
Preferred Stock exercisable by
the Trust, on or after the 5year anniversary of the effective date of the Plan, and
option to buy the Trust’s
Preferred Stock exercisable by
Thurston, at any time after the
promissory note is paid in full,
in consideration of Thurston’s
payment of $1 million in cash;
d) cash in the amount of any
and all federal, state, or local
income tax benefits Thurston
receives after the effective date
of the Plan as a result of any
expenses or deductions reported or claimed on account of
contributions Thurston makes
to the Trust;
e) all remaining rights, claims
or causes of action, any settlement thereof or any rights to
proceeds, that Thurston may
have against any entity concerning, arising out of or in
any way related to any
Asbestos Related Claim or
Demand, including the proceeds from the settlement ultimately reached with Lloyd’s
and Zurich;
f) all net proceeds Thurston
receives in the future as a
refund from the CCR;
g) the funds held in two
accounts held in trust and consisting of proceeds paid to
Thurston, pursuant to confidential Pre-Petition asbestosrelated insurance coverage settlement agreements; and
h) all claims of Thurston
against other members of the
CCR for funding shortfalls
under multi-party settlements.
After filing its proposed reorganization plan, Thurston continued
work to achieve a consensual plan
with its major constituencies and
to resolve outstanding issues with
the CCR, Lloyd’s, Zurich, the
ACC, and the FCR. On February
16, 2006, the Bankruptcy Court
approved a settlement agreement
between Thurston and the CCR
and its members, pursuant to
which the CCR paid Thurston
$565,639 which Thurston would
contribute to the Trust upon confirmation. On February 21, 2006,
the Bankruptcy Court approved
separate settlement agreements
which Thurston had reached with
Lloyd's and Zurich which required
Lloyd's and Zurich to contribute a
total of $ 31.5 million to any trust
approved by the court pursuant to
a confirmed plan for the benefit of
holders of Asbestos Related Claims
and Demands.
MS&K continued to press the
ACC and FCR to support
Thurston’s plan. Thurston agreed
to the ACC’s recommendation
that Mark M. Gleason be appointed trustee of the trust and that the
trustee serve on Thurston’s Board
of Directors for as long as the trust
retained an interest in the preferred stock. A CPA and principal
in the Pittsburgh accounting firm
Gleason & Associates, Gleason
has significant experience serving
as trustee for large asbestos settlement trusts. After resolving issues
regarding significant retention of
management ownership and control by negotiating detailed
employment agreements and terms
of release of management control
should Thurston ever default on its
obligations under the plan, the
ACC and FCR agreed to support
Bankruptcy Law News
Volume XXIII, No. 1
confirmation of Thurston’s plan.
Throughout the bankruptcy
case, MS&K had been engaged in
discussions with representatives of
the EPA regarding the effects of
Thurston’s bankruptcy on the
EPA’s classification of Thurston as
a PRP with respect to the Virginia
landfill. Ultimately, the EPA
decided not to pursue Thurston
prior to confirmation and, more
importantly, agreed not to object
to Thurston’s plan which channeled all environmental claims
against Thurston to the trust. The
EPA informed MS&K that
Thurston’s plan was the first
instance in which the EPA did not
object to the channeling of potential claims for remediation liability
to a 524(g) trust.
Shortly after filing its plan,
Thurston filed a motion, pursuant
to 28 U.S.C. § 157(d) and
Bankruptcy Rule 5011(a), and
asked the United States District
Court to partially withdraw the reference of Thurston’s bankruptcy
case from the Bankruptcy Court for
the limited purpose of consideration of confirmation of Thurston’s
plan in accordance with Section
524(g). Counsel for Thurston
asked the District Court to preside
Winter 2007
jointly with the Bankruptcy Court
at the confirmation hearing on
Thurston’s plan of reorganization,
to enter the order confirming the
plan, and to issue the supplemental
injunction. The District Court
agreed to the partial withdrawal of
the reference; however, rather than
sitting jointly with the Bankruptcy
Court at any confirmation hearing,
the District Court directed the
Bankruptcy Court “to conduct an
evidentiary hearing for the purposes of submitting a Report and
Recommendation that includes
findings of fact and conclusions of
law concerning the confirmation
of Debtor's Plan, and the issuance
of the Supplemental Injunction.”
The Bankruptcy Court conducted
a hearing on confirmation of
Thurston’s plan on March 14,
2006, and the next day submitted
its Report and Recommendation
to the District Court. On March
30, 2006, the District Court
entered an order adopting the
Report and Recommendation,
confirmed Thurston’s plan, and
issued
the
Supplemental
Injunction which directed all
holders of Asbestos Related Claims
and Demands against Thurston to
seek relief only from the trust
established in Thurston’s plan of
reorganization. The plan became
effective the next day on March
31, 2006.
IV. CONCLUSION
Since the plan went into
effect, Thurston has made all
transfers to the trust required to
date by the plan, and Zurich and
Lloyd’s have paid a total of $ 31.5
million to the trust pursuant to the
settlement agreements. All claims
not channeled to the trust have
been satisfied in accordance with
the plan, a final report of the case
has been filed with the Bankruptcy
Court, and the final decree closing
the case was entered on September
27, 2006. In October, Thurston
filed with the IRS a request for a
private letter ruling that the trust is
a qualified settlement trust entitled
to the tax benefits that Thurston
anticipates paying to the trust pursuant to the plan. Thurston is
finally able to focus on its insulation contracting business relieved
of the burden of twenty years of
mass tort litigation. v
Section Update: Website
T
he Board of Governors of the Bankruptcy
Section decided that the Section’s webpage
needed some changes. The most requested
change was the installation of a listserv so that members of the Section could post questions and receive
responses regarding questions of bankruptcy law.
However, because of privacy concerns, this change is
not yet able to be introduced, but the Board of
Governors is working with the Virginia State Bar
toward the implementation of a listserv. The section
will be instituting a "push" e-mail service to distribute
to all of the members of the Section all of the newly
Bankruptcy Law News
published decisions by the Bankruptcy Judges in both
the Eastern and Western Districts of Virginia.
So please make sure that your e-mail address that is
registered with the Virginia State Bar is current so that
you can receive the first of our new case reports. Also,
if your e-mail system has a spam filter, please make
changes to it to allow Virginia State Bar e-mails to
come into your inbox. Also, your ideas and suggestions
for changes to the webpage would be greatly appreciated,
please
e-mail
them
to
[email protected]. v
Page 15
Winter 2007
Volume XXIII, No. 1
Clerk’s
Corner
By Carol Rickerson,
Western District
T
hank you for the opportunity to introduce myself
and tell you about my role with the United
States Bankruptcy Court for the Western
District of Virginia.
I come to the court with over 32 years of federal
government experience, the last 10 years of which were
with the Administrative Office of the US Courts in
Washington, DC. There, I worked in the Budget
Division, first as their automation manager and later as
a management and budget analyst.
This experience has well prepared me for the many
tasks associated with being the Chief Deputy Clerk.
The role of the Chief Deputy is to be the “alter ego” of
the Clerk of Court. Each Bankruptcy Court determines
how best to manage the division of responsibilities
between the Clerk and the Chief Deputy. In our
District, I have responsibility for the day-to-day management of the case managers and systems staff in our
Roanoke Divisional office, and of the deputies-incharge for the other two divisional offices located in
Lynchburg and Harrisonburg. Among other duties, my
responsibilities are primarily the efficient delivery of
case administration, including electronic case filing
and case management; case intake; records management; information technology; statistical reporting;
quality control; and personnel management.
To my amazement, a great deal of time is spent
reviewing case management procedures in order to
ensure that changes in laws/rules are correctly reflected in CM/ECF and that case managers understand how
those changes impact the processing of their casework.
While BAPCPA was effective in Fall of 2005, remaining portions of the Act pertaining to new statistical
reporting requirements became effective in October
2006, resulting in new docket events, forms, and filing
requirements. Using correct docket events has
become more important now than ever before, as
much of the new statistical data being collected is
drawn directly from specific docket events. These statistics can directly affect resource allocation to
Bankruptcy Courts, and could ultimately affect the
level of service to our customers.
In order to continue providing the best service that
we can to the entire bankruptcy community, we are
constantly striving to improve processes and procedures. Recent endeavors include development of a new
internal web site for the Court, and later, an updated
version of our external site; development of a new online training program for attorneys, trustees, and their
staffs; continuing our goal of sharing information across
the District and becoming more consistent in case processing; upgrading our telephone and computer technologies; and responding to the perpetual need to
restructure and reassign workload with the ups and
downs of bankruptcy filings.
Our primary goal in the Clerk’s office is to do all
that we can to ensure a smooth process for all parties in
bankruptcy cases, from the filing of the petition to the
eventual closing and discharge of the case. Any suggestions for improving our performance and meeting that
goal is always appreciated and eagerly requested. v
Section Update: CLE Programs
T
he Section is pleased to be
offering four telephone seminars this year in lieu of a
single one-day live annual bankruptcy CLE program.
The
Seminars are scheduled for March
29, April 4, April 12, and April
19, with replay dates also planned.
Practitioners can sign up for any
one or all of the programs, with a
discount provided for those who
Page 16
enroll in all four. We have a
superb panel lined up for each
topic, with each panel comprised
of experienced practitioners and a
bankruptcy judge. Topics include
“What You Need to Know To
Commence
a
Consumer
Bankruptcy”, “Reaffirmation and
Redemption of Collateral”, “One
is the Loneliest Number (a guide
to Chapter One of the Bankruptcy
Code” and “Means Testing—
What We’ve Learned in a Year
since BAPCPA”. The programs
will be geared to help both the
experienced practitioner as well as
the lawyer starting to do bankruptcy work. We are excited about
using this new format to make our
bankruptcy programs more accessible to members of the bar. v
Bankruptcy Law News
Volume XXIII, No. 1
Winter 2007
Case Summaries
Weiner v. Fort, 2006 WL 2527781
(4th Cir. 2006).
Miscellaneous – Res Judicata
Treatment of Consent Orders –
Suit against Law Firm for PrePetition services to Debtor
Background: A law firm represented Spartan International
(“Spartan”) to prepare to file for
Chapter 11. Instead, on advice of
the law firm, Spartan turned over
control and possession of its assets
to its lender. At the end of the
law firm’s representation of
Spartan, Spartan owed the firm
$26,246.63. Spartan’s creditors
filed an involuntary Chapter 7
petition against it. The petition
was granted and a Chapter 7
Trustee (the “Trustee”) was
appointed.
The Trustee asked the law
firm to turn over the law firm’s
files on Spartan. The law firm
refused, asserting an attorney’s
lien. The Trustee and the law
firm ultimately agreed that the
law firm would turn over the files
and the law firm would be awarded an administrative claim for
one-half of the fees due. The parties agreed on a consent order
resolving the law firm’s claim for
attorney’s fees and memorializing
their bargain.
The next year, the Trustee
sued the law firm and others alleging that, but for the advice of the
law firm, Spartan would have filed
for Chapter 11 and would have
realized greater value through
asset sales (or been successfully
reorganized) to the benefit of the
creditors. The law firm defended
by claiming that the consent
order was a final decision on the
merits of the question of the
nature and value of the firm’s
legal services and could not be
attacked after the fact. The
Bankruptcy Court held that the
consent order did not resolve
issues regarding the reasonableness and necessity of the firm’s
services. The District Court
affirmed and the case was
appealed to the Fourth Circuit.
judgments. Under this analysis,
Judge Gregory found that the parties did not intend to resolve any
issues regarding the quality of the
law firm’s legal services, but only
intended to resolve the Trustee’s
right to the files and other
records. Judge Traxler concurred,
emphasizing that the proper
method of analyzing the case was
by reviewing the intent of the
parties.
Holding: The Fourth Circuit
affirmed. The opinion, by Judge
Gregory, analyzed the question as
one of res judicata. The Court
explained that the consent order
met the first two requirements for
res judicata (first, that the judgment was final and on the merits
and rendered by a competent
court with jurisdiction over the
parties and, second, that the parties in the two actions are identical or in privity), but that the
claims in the second matter were
not based on the same cause of
action involved in the first proceeding. Judge Gregory explained
that the Bankruptcy Court was
not required to consider any facts
pertaining to the law firm’s services to Spartan in order to approve
the consent order. In fact, as the
services were rendered pre-petition, the Bankruptcy Court had
no basis to evaluate the quality of
the firm’s services.
In the alternative, the Court
considered the intent of the parties, as consent orders can be
interpreted using contract interpretation principles, due to the
contractual nature of consent
Lambert v. Callahan, Trustee (In re
Lambert Oil Co., Inc.), 347 B.R.
508 (W.D. Va. 2006) (Judge
Jones).
§ 553 – Setoff; Miscellaneous –
Pre-Judgment Interest
Background: Lambert Oil originally filed for Chapter 11. The
case was later converted to
Chapter 7. The Trustee filed an
action against the former president and sole shareholder of the
debtor (Lambert) to collect outstanding loans. At issue in the
trial was whether Lambert was
entitled to a setoff of over
$283,000.00 for the proceeds of
sale of real estate he personally
owned that was applied against
his debt to the debtor. The
Bankruptcy Court permitted the
setoff and entered judgment
against Lambert for just over
$224,000.00. At issue on appeal
was whether the Bankruptcy
Court had properly calculated prejudgment interest due and
whether setoff was appropriate.
Continued on page 18
Bankruptcy Law News
Page 17
Winter 2007
Holding: The District Court
affirmed the majority of the
Bankruptcy Court’s award, holding that setoff was proper and that
the interest award was, for the
most part, properly calculated.
Judge Jones did find that the
Bankruptcy Court improperly
applied a 9% rate of interest to a
portion of the debt and remanded
for a recalculation of the interest
award on that basis.
On the interest issue, the
District Court held that it was not
error to calculate pre-judgment
interest based on the amount
Lambert owed the debtor at the
end of each year prior to applying
the setoff. This resulted in a large
amount of interest included in the
award as Lambert owed the debtor
in excess of $300,000.00 in several
years. (The actual principal
amount awarded the Trustee, after
the setoff, was approximately
$46,500.00). Lambert argued that
interest could only be calculated
based on the actual principal
amount of the debt. Judge Jones
held that under Virginia Code §
8.01-382 the court may provide
for interest “‘on any principal sum
awarded’ without further explanation. Because the purpose of the
prejudgment interest statute is to
fully compensate the plaintiff and
the award of prejudgment interest
is within the sound discretion of
the court, I uphold the bankruptcy
court’s method of awarding interest based on the year-end balances.” Lambert, 347 B.R. at 515.
Judge Jones did hold that Virginia
Code § 6.1-330.54 provides that
courts applying the default rate of
interest are required to use the
interest rate in effect at the time
judgment is entered, which is currently 6%, and reversed the
Page 18
Volume XXIII, No. 1
Bankruptcy Court’s application of
a 9% interest rate (the prior statutory rate) for part of the pre-judgment interest award.
On the setoff issue, the
District Court affirmed the
Bankruptcy Court’s application of
setoff. The debtor’s debt to
Lambert arose after Lambert
pledged personally owned real
estate to secure the debts of the
debtor. Lambert sought setoff for
the amounts received from the
sale of that real estate. The
Trustee argued that the debtor
could not meet § 553’s mutuality
requirement because the debt was
required to be subordinated under
§ 509(c). Judge Jones cited to
Collier’s, which states that subordinated claims do not destroy mutuality under § 553. See Lambert,
347 B.R. at 519. The Trustee also
challenged the setoff as
inequitable because, under § 553,
an award of setoff lies within the
equitable discretion of the court.
Judge Jones found that “ I cannot
conclude that the bankruptcy
court committed a ‘clear error of
judgment’ in allowing Lambert to
offset his debt to Lambert Oil
with a debt that Lambert Oil
clearly owed to him, even if I
might have found setoff
inequitable because of the fact
that Lambert was using Lambert
Oil as a personal source of funds.”
Lambert, 347 B.R. at 521. The
District Court also cited again to
Collier’s explaining that equitable
considerations are losing their
place in the setoff analysis: “the
best statement of modern law and
practice is that, if the relevant
claim and debt constitute mutual
obligations within the meaning of
section 553, a right of setoff
should be recognized in bankrupt-
cy unless the right is invalid in
the first instance under applicable
nonbankruptcy law, or unless it is
otherwise proscribed by some
express provision of the Code.”
Lambert, 347 B.R. at 521.
Jordan v. Smith, Trustee, 2006 WL
2787885 (E.D. Va. 2006) (Judge
Smith).
Section 727 – Revoking a
Debtor’s Discharge for Failure to
Obey Administrative Order –
Appeal of Case Discussed in Last
Issue
Background: This is an appeal of
Smith, Trustee v. Jordan (In re
Jordan), Adversary Proceeding
number 06-7035 (Bankr. E.D. Va.
2006) (unpublished) (Judge
Adams), discussed in the last issue
of the Bankruptcy Law News.
The debtor was provided the
Eastern District’s form
Administrative Order, which,
among other things, directed the
debtor to preserve estate property
and cooperate with the Trustee.
The debtor received her discharge.
Shortly after the discharge, the
debtor refinanced her property,
eliminating the equity in the
property. Unaware of the refinancing, the Trustee filed a
motion to sell debtor’s real property. Once the Trustee learned of
the re-financing, the Trustee withdrew his motion to sell and
brought a complaint to revoke the
debtor’s discharge. Judge Adams
found for the Trustee and revoked
the debtor’s discharge.
Holding: On appeal, the District
Court examined the two
approaches towards determining
Bankruptcy Law News
Volume XXIII, No. 1
when a debtor has “refused” to
obey a lawful order of the Court.
Judge Smith held that “[a]fter
examining each of these
approaches, the court joins the
majority and holds that a trustee
seeking a revocation of discharge
must establish that the debtor
willfully and intentionally refused
to obey the court’s order. Thus,
the trustee must show more than a
mere failure to obey the court’s
order that results from inadvertence, mistake, or inability to
comply; he must demonstrate
some degree of volition or willfulness on the part of the debtor.
Under this standard, the trustee
may meet his burden by showing
that the debtor received the order
in question and failed to comply
with its terms.” Jordan at *3.
(The Bankruptcy Court had held
that since the Administrative
Order does not address intent,
whether the debtor was willfully
uncooperative is irrelevant).
Although the District Court
adopted a different legal standard,
the court ultimately affirmed the
Bankruptcy Court’s determination, holding that “[t]he fact that
the debtor received the
Administrative Order and simply
ignored and acted contrary to its
directives is sufficient, under the
majority standard discussed above
and adopted by this court, to constitute a refusal to obey the order.”
Id. at *4.
Judge St. John applied Jordan
in awarding the Trustee summary
judgment in Marcus, Trustee v.
Jeffries (In re Jeffries), Adversary
Proceeding number 06-07075SCS (Bankr. E.D. Va. 2006),
which was decided in late October
of 2006 under similar facts. In
Jeffries, the debtor had failed to
Winter 2007
comply with the Bankruptcy
Court’s form Administrative
Order and with an Order granting
a Motion for Turnover, that provided the debtor would turnover
proceeds of a re-financing to the
Trustee.
Boleman Law Firm, P.C. v. U.S.
Trustee, 2006 WL 3455062 (E.D.
Va. 2006) (Judge Spencer).
Miscellaneous – Supplemental
Fee Applications in Chapter 13
Cases – Appeal of Case
Discussed in Last Issue
Background: This is an appeal of
In re Vernon-Williams, 343 B.R.
766 (Bankr. E.D. Va. 2006) (Judge
St. John) discussed in the last
issue of the Bankruptcy Law
News. In Vernon-Williams, the
Bankruptcy Court held that attorneys must submit detailed supplemental fee applications including
contemporaneous, actual time
records so that the Court could
weigh the required factors to
assess the reasonableness of the
fees. Accordingly, Judge St. John
rejected the Boleman firm’s use of
“minimums” to determine time
spent on various tasks.
“Minimums” are lengths of time
that the Boleman Firm has determined, based on its experience,
are the minimum amount of time
that would permit an attorney or
paralegal to effectively complete a
given task.
Holding: Judge Spencer affirmed
several evidentiary rulings made
by the Bankruptcy Court, but held
that the unavailability of actual
time records “does not preclude
further analysis [of fee applica-
tions]-especially when, as in this
case, it is undisputed that the
work for which compensation is
sought was performed.” Boleman
Law Firm at *3. The District
Court went on to hold that the
Bankruptcy Court should apply
the twelve factors set out in
Johnson v. Georgia Highway
Express, 488 F.2d 714, 717-19 (5th
Cir. 1974), and “review the fee
application and evidence submitted in support thereof (e.g., testimony and affidavits), and adjust
the award “(i) by identifying and
disallowing specific hours that are
not adequately documented, or
(ii) by reducing the overall fee
award by a fixed percentage or
amount based on the trial court’s
familiarity with the case, its complexity, and the counsel involved.”
Boleman Law Firm at *3.
Massey Energy Co. v. West Virginia
Consumers for Justice, 351 B.R.
348 (E.D. Va. 2006) (Judge
Cacheris).
28 U.S.C. § 1334 – Mandatory
Abstention
Background: Massey Energy filed
a complaint in Virginia state court
against a political advocacy group
for defamation and business conspiracy based on political advertisements run in the months
before the 2004 elections in West
Virginia. The state court heard
approximately one year of preliminary matters. Then West Virginia
Consumers for Justice (“WVCJ”)
filed for Chapter 11 in the
Southern District of West
Virginia. After the bankruptcy filing, WVCJ filed a notice of
Continued on page 20
Bankruptcy Law News
Page 19
Winter 2007
Case Summaries
Continued from page 19
removal removing the case from
Virginia state court to the U.S.
District Court for the Eastern
District of Virginia. Massey filed a
motion to abstain or remand the
case back to the state court based
on 28 U.S.C. § 1334.
Holding: The District Court
abstained from the case and
remanded it back to state court.
As Judge Cacheris explained:
“[u]nder [28 U.S.C.] § 1334(c)(2),
the requirements for mandatory
abstention are: (1) a party to the
proceeding files a timely motion
to abstain; (2) the proceeding is
based upon a state law claim or
state law cause of action; (3) the
proceeding is a ‘non-core, but
related to’ proceeding (not ‘arising
under’ Title 11); (4) the proceeding is one which could not have
been commenced in a federal
court absent jurisdiction under [28
U.S.C.] § 1334; (5) an action is
commenced and can be timely
adjudicated in state court.”
Massey Energy, 351 B.R. at 350.
The essential question in the case
was factor five, whether the action
could be timely adjudicated in
state court. Judge Cacheris held
that “not only will this claim
clearly be timely adjudicated, but
it also will probably reach adjudication with more celerity than
any other forum [if it remains in
the state court].” Massey Energy,
351 B.R. at 352. The court based
its holding, in part, on the fact
that the case had already been set
for trial once, but continued upon
the request of the parties, with the
state court’s ruling that the case
would not be continued a second
time.
Volume XXIII, No. 1
In addition, the District Court
concluded that even if mandatory
abstention was not appropriate,
permissive abstention was appropriate. Permissive abstention is
appropriate under 28 U.S.C. §
1334(c)(1), “in the interest of justice” or “in the interest of comity
with State courts or respect for
State law.” Judge Cacheris
explained that the case was
entirely based on state law and
the state courts had devoted significant resources to resolving the
pre-trial matters. Under such circumstances, the District Court
found that permissive abstention
was appropriate.
In re Norman, 2006 WL 3053309
(Bankr. E.D. Va. 2006) (Judge
Adams).
§ 329 – Requirement that
Debtor’s Attorney Provide
Consultation and Engagement
Letters to Chapter 13 Trustee
Background: The debtor filed for
Chapter 13. Included in the
papers related to the filing was a
disclosure of compensation to the
debtor’s attorney, which provided
details of the attorney’s total fee
($3,000.00), the amount already
paid (approximately $1,410.00),
and a discussion of what was and
was not covered in the $3,000.00.
At the § 341 meeting the Chapter
13 trustee requested a copy of the
consultation and engagement letters between the debtor and the
attorney. The debtor refused and
the Trustee filed a motion to
require the turnover of the documents.
Holding: The Bankruptcy Court
Page 20
ordered the turnover of the consultation and engagement letters
to the Trustee, “not just in the
instant case, but in all cases filed
under 7, 11, 12, 13 or 15.” In re
Norman at *7.
The debtor conceded that the
letters were not covered by the
attorney/client privilege.
Accordingly, the only issue before
the Court was whether the
Trustee had the authority to
request and receive the letters.
Judge Adams pointed out that §
329 requires the debtor’s attorney
to file a statement of compensation and Bankruptcy Rule 2016
requires disclosure of attorney
compensation within 15 days of
the order for relief and within 15
days of any payment not already
disclosed. The Bankruptcy Court
cited to one pre-BAPCPA case
that required disclosure of fee
agreements in order for debtor’s
counsel to receive post-confirmation compensation.
The Court then analyzed the
BAPCPA sections that mandate
extensive disclosures to individuals seeking bankruptcy assistance,
including a requirement that contracts be in writing. Judge Adams
found that the letters must be produced for review, considering
BAPCPA’s disclosure requirements
and § 329, despite the fact that §
329 and Rule 2016 do not
expressly mention the documents.
The Bankruptcy Court then
went on to hold that it was proper
to require turnover to the Trustee,
as opposed to the U.S. Trustee.
The Bankruptcy Court discussed
the duties of a Chapter 13 Trustee
under §1302(b) and then
explained that “[i]t is clear from
this laundry list of responsibilities
of the standing trustee in a
Bankruptcy Law News
Volume XXIII, No. 1
Chapter 13 case that his or her
duty, as an appointee of the
United States Trustee, is to monitor case administration. It follows
that any disclosures that are
required to be made to the
[United States Trustee] should
also be made to the Chapter 13
trustee, who handles the day to
day administration of the case.”
In re Norman at *6.
In re Winters, Case number 0670447 (Bankr. W.D. Va. 2006)
(Judge Krumm) (unpublished).
§ 362(c)(4) – Imposition of Stay
in Case where Debtor had been
Debtor in two Prior Cases
Within the Year Prior to Filing
Current Case
Background: The debtors filed for
Chapter 13 on June 13, 2006.
The debtors had filed two prior
Chapter 13 cases, both of which
had been dismissed within a year
of filing their third case. Both
cases were dismissed due to the
debtors’ failure to make Plan payments. Under § 362(c)(4)(A) no
stay went into effect upon the filing of the third case. The debtors
petitioned the Court to impose
the automatic stay. The debtors
explained that the first case was
dismissed because the male debtor
was self employed and his income
was dependent on good weather.
With regard to the second case,
the debtors explained that they
were required to pay for extensive
dental treatment. At the time of
the third case, the male debtor
had become a salaried employee
with his employer and his income
was no longer dependent on good
weather. The male debtor
arranged for payments into the
Bankruptcy Law News
Winter 2007
Plan to be made by wage deduction. Neither the Trustee nor any
creditors objected to the debtors’
motion to impose the stay.
Holding: The Bankruptcy Court
imposed the automatic stay. Judge
Krumm explained that §
362(c)(4) creates a presumption
that the debtors did not file their
case in good faith and that they
are required to rebut the presumption by clear and convincing evidence in order for the Court to
put the stay into place. The
Bankruptcy Court explained that
it had not located any cases under
§ 362(c)(4) discussing what would
constitute clear and convincing
evidence to rebut the presumption. Therefore, the Court turned
to cases decided under similar sections like § 362(c)(3). Judge
Krumm ultimately found that the
fact that the male debtor was
employed in a salaried position,
their desire to save their home,
their reasonable explanation for
the dismissal of the prior cases,
and the changed circumstances
since the last filing were sufficient
evidence to rebut the presumption
of bad faith and permit the Court
to impose the stay.
In re Luders, 2006 WL 3487980
(Bankr. W.D. Va. 2006) (Judge
Krumm).
§ 521(a)(1) – Hearing Required
on Debtor’s Failure to Submit
Required Income Information
Background: Husband and wife
debtors filed a Chapter 13 petition. Within a month of the petition date, the debtors submitted
pay stubs to the Trustee, but several pay stubs were missing.
However, the pay stubs submitted
contained year to date information that would permit the calculation of the missing information
from the information submitted.
The debtors later submitted the
missing pay stubs, but did so after
45 days from the petition date and
they did not file a request for an
extension of time.
Section 521(a)(1)(B)(iv)
requires a debtor to file with the
Trustee copies of “payment
advices” or other evidence of payment received within 60 days
before the petition date. Section
521(i) provides that if the debtors
fail to file such proof of payment
within 45 days from the petition
date, the case shall be automatically dismissed, effective on the
46th day after the petition date.
The Trustee filed a notice of
the debtors’ failure to comply with
§ 521(a)(1)(B)(iv) and the Court
heard argument on the Notice.
Holding: The Bankruptcy Court
held that the payment information
submitted was sufficient under the
Code and vacated the Trustee’s
notice. The Court noted that the
information submitted, because it
contained year to date information, could be used to determine
the missing information.
Most notable in the decision
is that Judge Krumm determined
that the court did have the
authority to hold a hearing on the
matter, explaining: “[i]n this case
failure to afford the debtors an
opportunity to be heard would
have adverse consequences to the
debtors because refiling their petition would trigger the provisions
of 11 U.S.C. § 362(c)(3) or (4)
pertaining to continuation or
Continued on page 22
Page 21
Winter 2007
Case Summaries
Continued from page 21
imposition of the stay.
Alternatively, the debtors could
move the court to vacate the
order of dismissal and reinstate
the case. Using either approach
results in time and expense to the
debtors and potential confusion to
creditors as to the status of the
case. Equity dictates that the certification by the Trustee of noncompliance and the notice of a
hearing thereon did not trigger
automatic dismissal. This court
can consider the merits of debtors’
position that there was sufficient
information in the timely filed
payment advices to meet the
statutory requirements.” In re
Luders at *2.
Kubota Tractor Corp. v. Strack (In
re Strack), 2006 WL 2868936
(Bankr. E.D. Va. 2006) (Judge
Adams).
§ 523(a) – Dischargeability of
Debt Incurred under Floor Plan
Financing Contract
Background: Kubota manufactures tractors, mowers, and similar
outdoor equipment. The debtor
was the president of a Kubota
dealer known as Enterprise. The
debtor personally guaranteed
Enterprise’s debts to Kubota.
Enterprise bought parts from
Kubota on an open account basis.
Kubota’s tractors and other equipment were subject to a floor-plan
financing arrangement that
required Enterprise to pay the proceeds of sales over to Kubota.
Enterprise developed financial
difficulties and it was determined
that it owed approximately
Page 22
Volume XXIII, No. 1
$190,000.00 to Kubota for sales of
various equipment. Enterprise
made a number of payments and
returned parts, which reduced the
debt to approximately
$124,000.00. Unable to make further payments, the debtor
arranged to relinquish Enterprise’s
franchise rights as part of a transaction whereby a third-party
would pay Kubota $150,000.00 on
Enterprise’s debt in return for the
Kubota franchise. The third-party
then apparently refused to sign
certain additional documents or
make the payment (this issue was
apparently not fully explained by
the evidence). Kubota sued
Enterprise and the debtor for the
amount due. After Kubota
obtained a default judgment, the
debtor filed for Chapter 7.
Kubota brought a nondischargeability action under § 523(a)(4)
(fiduciary fraud or defalcation)
and § 523(a)(6) (willful and malicious injury).
Holding: The Bankruptcy Court
found that the debt was dischargeable. With regard to the fiduciary
fraud count, Judge Adams
explained that there must be an
express trust in place between the
debtor and the creditor. While
the dealer agreement did provide
that Enterprise was required to
hold the proceeds of sales in trust
until they are paid over to Kubota,
the Bankruptcy Court held that
the agreement, in fact, created a
relationship where Enterprise was
a buyer of the goods and Kubota
was the seller, who retained a
security interest. As there was no
express trust arrangement, there
could be no declaration of nondischargeability under §
523(a)(4).
Judge Adams also held that
the injury was not “willful and
malicious.” The Bankruptcy
Court explained that “ in conversion cases, you must look past that
one moment in time [that establishes a technical case of conversion] in order to decipher the
debtor’s ultimate intent with
regard to the property. It is not
enough for the debtor to simply
say that ultimately he intended to
return the property; he must have
some reasonable expectation that
he will be able to do so.” Strack at
*7. Here, Judge Adams found
that the debtor intended to re-pay
the money due Kubota and had a
reasonable expectation of doing
so. The Bankruptcy Court based
this holding on the fact that the
debtor made efforts to reduce the
amount owed to $124,000.00,
took significant steps to improve
sales, and tried to arrange for the
sale of the franchise rights in satisfaction of the debt.
In re Rollins, Case number 0565013 (Bankr. W.D. Va. 2006)
(Judge Anderson) (unpublished).
§ 1322(b) – Mobile Home as
Real Property or Personal
Property for Purposes of
Cramdown
Background: In this pre-BAPCPA
case, the debtor was the owner of
a mobile home secured by a deed
of trust on real estate and a lien
on the title of the mobile home in
favor of a lender. The debtor filed
a valuation motion and Chapter
13 plan seeking to value the
mobile home at $1,000.00 and the
land where it was located at
Bankruptcy Law News
Volume XXIII, No. 1
$13,500.00. The home was tax
assessed, as personal property, at
$30,000.00 and the land was tax
assessed at $19,900.00. Section
1322(b)(2) states that a Chapter
13 plan may not modify a secured
claim that is secured by an interest in real property that is the
debtor’s principal residence. At
issue in the case was only the
question of whether the mobile
home and the land were “real
property” within the meaning of
that section.
Holding: Judge Anderson held
that the mobile home and the
land should jointly be considered
real property under § 1322(b)(2)
and that the debt to the lender
could not be modified through the
Plan. The Court explained that,
while property interests in bankruptcy are defined by state law, if
there is a countervailing federal
interest federal law may require a
contrary result. Here, Judge
Anderson explained that mobile
homes in Virginia are defined as
personal property for the purpose
of assessing and levying property
taxes. However, the Court examined § 1322(b)(2) and concluded
that it was primarily passed to protect mortgage lenders. As mobile
homes are generally financed by
mortgage lenders, Judge Anderson
concluded that the term “real
property” in § 1322(b)(2) includes
mobile homes.
U.S. Trustee v. Sours (In re Sours),
350 B.R. 261 (Bankr. E.D. Va.
2006) (Judge St. John).
§ 1328(f) – Availability of
Chapter 13 Discharge
Winter 2007
Background: The debtors filed a
Chapter 13 petition on June 12,
2006. Although they originally
indicated they had not filed a
bankruptcy case in the last eight
years, they had actually filed a
prior Chapter 13 case in North
Carolina in 2002. That case was
converted to Chapter 7 and they
received a Chapter 7 discharge on
October 24, 2003. The United
States Trustee filed a complaint
objecting to discharge on the
grounds that the debtors had
received a Chapter 7 discharge in
a case filed within four years of
the current case.
Holding: The Bankruptcy Court
found for the U.S. Trustee. At
issue was the meaning of §
1328(f). That subsection reads, in
part: “the court shall not grant a
discharge . . . if the debtor has
received a discharge – (1) in a
case filed under chapter 7, 11, or
12 of this title during the 4-year
period preceding the date of the
order for relief under this chapter,
or (2) in a case filed under chapter 13 of this title during the 2year period preceding the date of
such order.”
On its face, § 1328(f) would
not bar the debtors from receiving
a discharge in the current case as
the debtors did not file the 2002
case under chapter 7, 11 or 12.
However, the U.S. Trustee argued
that the Court should not strictly
apply the “plain meaning” rule but
instead look at the entire statutory
scheme as a whole, including §
348, which discusses conversion.
Judge St. John concluded:
“under § 1328(f)(1), the Debtors
are not entitled to receive a discharge in the Pending Case. The
Debtors have argued that the lit-
eral interpretation of § 1328(f)
requires a conclusion that it is the
Chapter under which a case is
filed, not the Chapter under
which a discharge is received, that
determines their right to a discharge in the Pending Case.
However, this Court finds that the
more compelling position is that
the Debtors’ literal interpretation
of § 1328(f) not only fails to contemplate the effect of § 348 of the
Bankruptcy Code but runs contrary to congressional intent, but
also leads to an absurd result.”
Sours, 350 B.R. at 269. According
to the Bankruptcy Court, under §
348(a) “a converted case relates
back to the initial filing date for
all purposes, including matters
relating to discharge.” Sours, 350
B.R. at 268.
With regard to the issue of the
absurd result under the debtors’
position, the Bankruptcy Court
explained that “[u]nder the
Debtors’ proposed interpretation,
§ 1328(f) would not actually create a longer waiting period
between filings, but would instead
encourage debtors to initially file
a Chapter 13 case with no intention of successful completion.
Debtors could then immediately
convert in order to receive a
Chapter 7 discharge, while still
managing to preserve the shorter
time restriction between receiving
discharges, thus avoiding the
lengthier time restriction associated with an initial filing under
Chapter 7.” Sours, 350 B.R. at
269.
Wellington Apartment, LLC v.
Clotworthy (In re Wellington
Apartment, LLC), 2006 WL
3042670 (Bankr. E.D. Va. 2006)
Continued on page 24
Bankruptcy Law News
Page 23
Winter 2007
Case Summaries
Continued from page 23
(Judge Adams).
Miscellaneous – Enforcement of
Money Judgment Entered by
Bankruptcy Court
Background: The debtor, the
owner of an apartment complex in
Newport News, filed for Chapter
11. It brought suit against several
individuals and two LLCs related
to fraud in placing a second deed
of trust on the debtor’s real estate.
The proceeds of the second deed
of trust were used to invest in a
building in Louisiana. The trial
before the Bankruptcy Court
resulted in a judgment in favor of
the debtor for over $2.5 million
and an equitable lien being placed
on the building in Louisiana and
several of the defendants’ interests
in that building. The interests of
the two LLCs (“WPN” and “WPN
New Orleans”) in the building
were made subject to the lien.
The debtor filed a motion in
the Bankruptcy Court to have the
owner of the Louisiana building
pay it any monetary distributions
due the two LLCs and to send the
debtor any documents related to
the building that the two LLCs
were entitled to receive. The two
LLCs objected.
Holding: The Bankruptcy Court
held that it had jurisdiction over
the motion but that the creditor
was required to proceed under its
rights to enforce the judgment
created by Bankruptcy Rule 7069
and state law.
Judge Adams first considered
the issue of the Bankruptcy
Court’s jurisdiction to hear the
matter. The Bankruptcy Court
Page 24
Volume XXIII, No. 1
ultimately concluded that it did
have “related to” jurisdiction
under 28 U.S.C. § 157(a).
However, Judge Adams did point
out that in a Chapter 11 cases
where a Plan has been confirmed,
the court “retains only enough
jurisdiction to implement the
plan” under § 1142. In re
Wellington at *4. In this case, the
Bankruptcy Court concluded that
the fact that the only monies to
be distributed under the Plan
were proceeds of the litigation
meant that the Bankruptcy Court
had jurisdiction over efforts to
collect the proceeds of the litigation. Judge Adams also found
that the doctrine of ancillary
jurisdiction gave the Bankruptcy
Court the power to enforce its
own judgments.
On the merits of the debtor’s
motion, the Bankruptcy Court
turned first to Federal Rule of
Civil Procedure 69 (Bankruptcy
Rule 7069). That rule provides
that, for the most part, enforcement of federal judgments are to
be done “in accordance with the
practice and procedure of the state
in which the district court is
held.” Judge Adams explained
that, under Virginia law, a creditor
must wait 21 days after the judgment and then request a writ of
fieri facias (also called a writ of
execution) under Virginia Code §
8.01-466. The Bankruptcy Court
refused to order the building
owner to pay the debtor as no writ
of execution had yet been issued.
The Bankruptcy Court reached a
similar conclusion with regard to
the request for written documents
from the building owner. Judge
Adams concluded that the proper
procedure would be to request the
documents by subpoena under
Virginia Code § 8.01-506.1 and in
the absence of a subpoena, the
Court would not order the records
to be turned over.
In re Jones, 348 B.R. 715 (Bankr.
E.D. Va. 2006) (Judge Mitchell).
Miscellaneous – Request from
State Court Regarding Treatment
of Ad Damnum in Case where
Defendant had Received
Discharge but Claim was
Potentially Non-Dischargeable
Background: The debtor filed for
Chapter 7. The debtor was also a
defendant in a state court lawsuit
filed related to a car accident
brought by a passenger of the
debtor. While the bankruptcy
case was open, the passenger
brought a Motion for Relief seeking to continue with the state
court tort action. Relief was
granted by consent order, which
provided that the state court
could proceed with the action to
determine the amount of damages
so the passenger could seek compensation from the insurance carriers. The relief order also recited
that the passenger was not barred
from filing a non-dischargeability
action under § 523(a)(9) (drunk
driving injuries). The debtor
went on to receive her discharge.
The debtor filed a motion in
the state court case to reduce the
ad damnum to the amount of
available insurance coverage. The
state court requested an opinion
from the Bankruptcy Court.
Holding: The Bankruptcy Court
treated the state court’s request as
a request of the debtor for procedural purposes. Judge Mitchell
Bankruptcy Law News
Volume XXIII, No. 1
clarified that, although the state
court focused on the role of the
automatic stay, the issue before
the Bankruptcy Court was really
one of the scope of the discharge
injunction under § 524. The
court held that “[n]othing in the
discharge injunction prevents a
creditor from suing a debtor on a
non-dischargeable debt, or, for
that matter, naming the debtor as
a nominal defendant in a suit to
recover even a dischargeable debt
so long as the judgment will not
be enforced against the debtor.”
Jones, 348 B.R. at 719. Judge
Mitchell did point out that a wise
creditor will seek relief from the
bankruptcy court before proceeding on a debt that may be subject
to the discharge injunction, in
order to avoid the risk of being
held in contempt.
Ultimately the Bankruptcy
Court concluded that it would not
require the ad damnum be reduced
as the plaintiff in the state court
suit had alleged facts that would
support a determination that the
debt was non-dischargeable.
However, Judge Mitchell stated
that “to the extent that [the passenger] recovers a judgment in
excess of the available insurance
coverage but is unsuccessful in
having the judgment determined
to be nondischargeable, [the passenger] will be required to mark
the judgment satisfied once she
has recovered from the insurance
policies.” Jones, 348 B.R. at 719.
The court further held that, unless
the judgment was found to be nondischargeable, the passenger could
not take any action to enforce it
against the person of the debtor or
her property and could only recover from the insurance policies.
Bankruptcy Law News
Winter 2007
The Official Committee of
Unsecured Creditors for Tyringham
Holdings, Inc. v. Suna Bros., Inc.
(In re Tyringham Holdings, Inc.),
2006 WL 3479711 (Bankr. E.D.
Va. 2006) (Judge Tice).
Miscellaneous – Validity of
Security Interest filed under
Incorrect Name of Debtor
Background: Suna Bros. consigned jewelry worth $310,925.00
to Tyringham Holdings, Inc. To
perfect its security interest, Suna
filed a financing statement listing
the debtor’s name as “Tyringham
Holdings.” The debtor’s correct
legal name is “Tyringham
Holdings, Inc.” An official UCC
search certified by the State
Corporation Commission under
the name “Tyringham Holdings,
Inc.” did not reveal the Suna
financing statement.
have been revealed by a search of
the SCC records under Tyringham
Holdings’ correct legal name, using
the SCC’s standard search logic.
Judge Tice held that the
financing statement was not valid.
Although there was evidence that
several private searches of the
UCC records had revealed the
Suna financing statement, the testimony from SCC representatives
was that a search using the term
“Tyringham Holdings, Inc.” would
not have revealed the financing
statement naming “Tyringham
Holdings.” Accordingly, the
exception of § 8.9A-506(c) was
not triggered. The Bankruptcy
Court reached this decision
despite the fact that the SCC is in
the process of changing its standard search logic to filter out the
term “inc.” from searches. v
Holding: The court found that
“unless excepted by Va. Code
Ann. § 8.9A-506(c), the financing statement is seriously misleading and is ineffective to perfect
Suna’s security interest” because it
was not filed under the correct
legal name of the debtor.
Tyringham Holdings at *1.
Virginia Code § 8.9A-506(c),
provides that: “[I]f a search of the
records of the filing office under
the debtor’s correct name, using
the filing office’s standard search
logic, if any, would disclose a
financing statement that fails sufficiently to provide the name of the
debtor in accordance with § 8.9A503(a), the name provided does
not make the financing statement
seriously misleading.” Therefore,
the question was whether the
Suna financing statement would
Page 25
Volume XXIII, No. 1
Winter 2007
About the Bankruptcy Law Section
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membership of over 600 attorneys. The Section’s primary goal is to enhance the
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Winter 2007
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