Tag Archives: Chapter 7 Bankruptcy

Ninth Circuit Bankruptcy Appellate Panel Opinions – March 2022

By Ryan C. WoodG

1. Gutierrez v. Oregon State Department of Corrections  – 523(a)(17), 11 USC 28. 1915(b)(2)

2. Ebuehi v. United States Trustee, Los Angeles – 727(a)(3), (a)(4), (a)(6)

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1.   GUTIERREZ; BAP No. ID-21-1156-SGB; March 2, 2022

Bankruptcy court does not have “related to” subject matter jurisdiction over claims/allegations that arise after a Chapter 7 bankruptcy case is fully administered.  The claim/allegation cannot therefore affect or change a debtor’s rights, liabilities, options, or freedom of action which impacts the administration of the original bankruptcy case; it is done; See Section 523(a)(17) of the bankruptcy code and 28 U.S.C. Section 1915(b)(2)  

Mr. Gutierrez appealed a couple of issues from his Chapter 7 bankruptcy case.  Yes, humans may file for bankruptcy relief when incarcerated.  Most bankruptcy attorneys will never file a case for an incarcerated human.  It is far more likely that a human files their own Chapter 7 bankruptcy case rather than hire a bankruptcy lawyer to assist them.

Mr. Gutierrez received his discharge of debt, the case was closed, then Mr. Gutierrez reopened the Chapter 7 case to file two adversary lawsuits alleging various allegations.  One of which was against the Oregon State Department of Corrections.  Mr. Gutierrez owed a debt based upon federal court fees incurred under 28 U.S.C. Section 1915(b). 

While Mr. Gutierrez admitted that the nature of the fees are governed by Section 523(a)(17); barring dischargeability of such fees, he argued that  

Bankruptcy Code Section 523(a)(17) provides:

(a)A discharge under section 727, 1141, 1192 [1] 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(17) for a fee imposed on a prisoner by any court for the filing of a case, motion, complaint, or appeal, or for other costs and expenses assessed with respect to such filing, regardless of an assertion of poverty by the debtor under subsection (b) or (f)(2) of section 1915 of title 28 (or a similar non-Federal law), or the debtor’s status as a prisoner, as defined in section 1915(h) of title 28 (or a similar non-Federal law)

The not dischargeable federal fees are collected from the inmate’s prisoner trust account by the applicable correctional institution. See 28 U.S.C. § 1915(b)(2). Thus, Mr. Gutierrez’s issue is with the Oregon Department of Corrections.

FIRST, Mr. Gutierrez argues the federal court fees, while covered by Section 523(a)(17), they should be dischargeable given none of his appeals were frivolous.  SECOND, Mr. Gutierrez challenged how the federal court fees were collecting the allegedly not dischargeable federal court fees.  28 U.S.C. Section 1915(b)(2) limits the amount that can be collected to 20% of the prior months credited income to their prisoner account without consideration of the number of cases the prisoner owes federal court fees. Mr. Gutierrez’s issue is notification of how the not dischargeable court fees were to be collected: 20% of his income PER lawsuit filed and not 20% of total without consideration of number of cases.

The lower bankruptcy court dismissed the Section 523(a)(17) allegation and held it did not have jurisdiction over the allegation of wrongful collection method of the federal court fees and 28 U.S.C. Section 1915(b). 

Standards of This Appeal

De novo review = appellate court reviews case as if the case is being heard for the first time; subject matter jurisdiction requires de novo review upon appeal 

Abuse of discretion = concerning retention of jurisdiction after case dismissal

Abuse of discretion occurs when the lower bankruptcy court applies an incorrect legal rule or when its factual findings are illogical, implausible, or without support in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).

Mr. Gutierrez focuses his argument on “related to” the bankruptcy case for the lower bankruptcy court to have jurisdiction. A bankruptcy court may have “related to” jurisdiction if the result could change a debtor’s rights, liabilities, options, or freedom of action which impacts the administration of the original bankruptcy case.   

HOLDING: The collection of the not dischargeable federal court fees is not part of the bankruptcy court’s jurisdiction.  At the time Mr. Gutierrez filed the adversary proceeding lawsuit his Chapter 7 bankruptcy case was fully administered.  Only then did the Oregon Department of Corrections begin collecting the fees.  Jurisdiction for “related to” is the date the adversary lawsuit is filed; not before.

In re Casamont Invs., Ltd., 196 B.R. at 521 (citing In re Fietz, 852 F.2d at 457 at n.2); measure of time is as when adversary proceeding filed/commenced

Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1193 (9th Cir. 2005)

Fietz v. Great W. Sav. (In re Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (cleaned up) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984))

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2.  Ebuehi, BAP No. CC-21-1199-FLT, March 8, 2022

The Ninth Cir. BAP held the bankruptcy court did not error in denying the Ebuehi’s their discharge pursuant to Sections 727(a)(3), 727(a)(4), and 727(a)(6). 

The Ebuehi’s originally filed a Chapter 11 reorganization case and confirmed, obtained approval, of the Chapter 11 Plan of Reorganization.  After approval creditors accused the Ebuehi’s of not making payments to them properly and misappropriating $5,000.00 a month in rental income.  The Court issued an order to show cause why the case should not be converted to Chapter 7 liquidation.  No real fight was mounted, and the case was converted to Chapter 7.

The Chapter 7 Trustee assigned to the case naturally sought to liquidate the Ebuehi’s assets including a piece of real property the Ebuehi’s resided at.  The Ebuehi’s eventually vacated the property.  The Chapter 7 Trustee then decided to file an adversary proceeding to take aware the Ebuehi’s discharge for alleged wronging doing pursuant to Section 727(a)(3), (a)(4) and (a)(6). 

Section 727(a)- the court shall grant a discharge unless

(3) the debtor concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information

(4) the debtor knowingly and fraudulently, in or in connection with the case (A) made a false oath or account

(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities

So the Court held denial of discharge was warranted under § 727(a)(6) given the Ebuehi’s had failed to comply with the Court order regarding conversion to Chapter 7 and turnover of the real property to the Chapter 7 Trustee.

In order to establish that the debtors “refused” to comply with an order, the party seeking to deny discharge “must show that Debtors (1) were aware of the order and (2) willfully or intentionally refused to obey the order (i.e., something more than a mere failure to obey the order through inadvertence, mistake or inability to comply).” Vaughan v. Weinstein (In re Vaughan), BAP No. NV-15-1254-JuKiD, 2016 WL 878308, at *7 (9th Cir. BAP Feb. 29, 2016).

Under § 727(a)(4) the debtors allegedly made a false oath regarding the number of missed mortgage payments.  The Ebuehi’s has 11 missed mortgage payments versus listing only 4.  Okay, so did they intentionally does this for some reason and does it really matter?  Apparently yes, yes it did.

The fundamental purpose of § 727(a)(4)(A) is to insure that the chapter 7 trustee and creditors have accurate information without having to conduct costly investigations.” Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999).

Under § 727(a)(3) because the Ebuehi’s allegedly failed to maintain records regarding the rental payments or turn over their record-keeping notebook, making it impossible to ascertain their financial condition.

Debtors are required to “present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past.” Id. (quoting Rhoades v. Wikle, 453 F.2d 51, 53 (9th Cir. 1971)).

The Ninth Cir. BAP found no error in the bankruptcy courts denial of the Ebuehi’s discharge.

Detailed Look and Examination of Ex-NFL Football Player Jamal Lewis’ 2012 Bankruptcy Filing – Part II

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If you did not know, Mr. Lewis’ bankruptcy case is still an ongoing case. Part I goes through the first part of the bankruptcy case, describing the players and some procedure and addresses arguably why Mr. Lewis’ case was converted to a case under Chapter 7 so soon after originally filing a Chapter 11 reorganization case. Part II begins with describing the various interests of three lesser creditors and what they did to enforce their rights in Mr. Lewis’ bankruptcy case. Keep in mind that as soon as a person or company files for bankruptcy protection the order of relief becomes effective stopping any and all collection activity, lawsuits, wage garnishments, repossessions and foreclosures for example. This is the backbone of every bankruptcy case and the grant of power to the bankruptcy court and judge. The bankruptcy court is the single point of focus for relief if you are owed money or have a claim for money against the bankruptcy filer.

If the case is a reorganization case no more payments are made to vendors, mortgages or vehicle loans without court permission. It is assumed or most likely that secured creditor payments will be made in a plan of reorganization. Reorganizing or changing the payment terms of a mortgage or vehicle loan in Chapter 11 or Chapter 13 is the name of the game and why a person or company can still stay afloat. Bankruptcy is a way to force more favorable repayment terms on secured creditors and get rid of unsecured debts all at the same time.

High Creditor Involvement Means Nothing But Trouble For a Bankruptcy Filer

Mr. Lewis’ bankruptcy case has had quite a few creditors actively involved from the very beginning of the case. That means nothing but trouble for a debtor seeking to reorganize or discharge debts. There are over eleven creditors to be discussed. Here are the first three.

1. Mercedes Benz Financial Services USA, LLC

On May 1, 2012, Mercedes-Benz Financial Services USA, LLC filed a motion for adequate protection. At some point Mr. Lewis financed the purchase of a 2010 Mercedes-Benz CL63 AMG with a balance owed at the time the bankruptcy case was filed of $110,934.41. The monthly payment on the loan is $2,026.35. Mercedes-Benz filed this motion to make sure they get monthly payments from Mr. Lewis while the bankruptcy case progresses. All secured creditors are entitled to be adequately protected against the depreciation of their collateral. Vehicles decrease in value rapidly as time goes on and can be easily hid or moved to thwart repossession. At the time this motion was originally filed Mr. Lewis was still in a Chapter 11 reorganization case. It could have been months before Mercedes-Benz received payment through a confirmed/approved plan of reorganization if they just sat back and waited to see what happened. In the meantime the collateral securing their loan is decreasing in value. So Mercedes-Benz is enforcing its right to be adequately protected against depreciation of the 2010 CL63 AMG by receiving the monthly payment of $2,026.35 from Mr. Lewis. On June 12, 2012, a consent order was signed by the court. Mr. Lewis agreed to pay $2,320.00 to Mercedes-Benz each month. This means that Mr. Lewis intended to keep the 2010 Mercedes-Benz CL63 AMG.

The consent order comes with a catch though. If Mr. Lewis fails to make the adequate protection payment totaling $2,320.00 each month, then Mercedes-Benz is immediately granted the right to repossess the vehicle without further order of the court. A secured creditor cannot repossess its collateral without permission from the bankruptcy court. By filing the motion for adequate protection Mercedes-Benz has killed two birds with one stone. They obtained an order from the court for adequate protection payments and they obtained relief from the automatic stay to repossess the 2010 Mercedes-Benz if Mr. Lewis fails to make the post-petition adequate protection payment totaling $2,320 per month. Mercedes-Benz is set now. They can sit back and collect their money each month until the loan is paid off or repossess the 2010 Benz if Mr. Lewis misses a payment.

2. Porsche Financial Services, Inc.

Unlike Mercedes-Benz, Porsche Financial Services, Inc. finds itself in a different position. Mr. Lewis leased a 2010 Porsche Panamera. Mr. Lewis is not offering Porsche adequate protection payments and Mr. Lewis also has not made a payment on the lease since February 2012. The total owed is $88,788.58 at the time the bankruptcy case was filed. Given these circumstances Porsche filed a motion for relief from stay on May 3, 2012, requesting permission from the court to repossess the 2010 Porsche Panamera immediately. Why bother trying to get adequate protection if the lease is already past due and it appears Mr. Lewis has not intent of continuing to make any more payments. On July 17, 2012, the bankruptcy court entered the order granting Porsche Financial Services, Inc. relief from the automatic stay. They may now repossess the 2010 Porsche Panamera and sell the Porsche at auction to pay off the lease balance.

3. F. Xavier Balderas and Regions Bank

Now this is where it starts to get interesting. F.Xavier Balderas and Regions Bank filed a joint motion for relief from the automatic stay on June 27, 2012. Keep in mind again that Mr. Lewis’ case is still a Chapter 11 reorganization case at this time. Basically F.Xavier and Regions Bank are saying we do not care that you are seeking to reorganize your debts. We believe we have grounds to get the court to allow us to foreclosure or repossess our collateral and continue to go after you despite the fact that you filed for bankruptcy protection.
On or around June 20, 2007 Mr. Lewis obtained a loan totaling $416,000 at 7.15% interest from Am SouthBank, now named Regions Bank. The note was secured by a 2007 Fountain Lighting 47’ recreational boat. This is basically a cigarette racing boat. They have v-shaped hulls, are long and have multiple very powerful (700 HP) engines. Mr. Lewis borrowed additional unsecured sums of money from AmSouth Bank/Regions Bank and then stopped making payments. In 2011 Regions Bank filed a lawsuit against Mr. Lewis in the state of Tennessee to recover the amounts due pursuant to the various unpaid notes by Mr. Lewis. Eventually a judgment was entered against Mr. Lewis totaling $676,299.63. Of this amount about $420,820.00 is secured by the 2007 Fountain Lightning 47.’ Mr. Lewis, on May 17, 2012, testified at the 341 meeting of the creditors that the value of the 2007 Fountain Lighting 47’ was only about $300,000. So, Mr. Lewis is not making any adequate protection payments to Regions Bank (if fact it was so bad they sued him in state court), there is no equity in the boat (the amount owed is far more than the fair market value of the boat) and this is a recreational craft in the purest way and is in no way necessary for anyone to reorganize their debts in a Chapter 11 case. After the filing of Region’s original motion for relief from stay this case was converted to Chapter 7 and a Chapter 7 trustee was appointed to administer the assets of the Mr. Lewis’ bankruptcy estate on August 8, 2012. Under these circumstances the boat is of no value to the bankruptcy estate and creditors given the amount of debt is far more than the value of the boat.

What many people fail to understand or realize is that many people or companies that file for bankruptcy usually keep their cars, houses and even toys like a large recreation boat when seeking bankruptcy protection. If the asset is of no value to the estate (more is owed on the asset then the asset is worth) and the bankruptcy filer can afford to make the secured debt payment each month they usually can keep the asset and continue to make the loan payments. Secured debts get first priority in many ways. In a recent 9th Circuit Court of Appeals case, In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013, regarding secured debts in Chapter 13 reorganizations cases, the 9th Circuit held that Congress did not intend to limit the amount of secured debt a Chapter 13 bankruptcy filer has. So basically a single person can have two car payments, 2 ATV payments and a monthly plane loan payment with no money left over to pay unsecured credit cards and that is okay under the Bankruptcy Code and Section 707(b). Again, the system is geared for the benefit of secured creditors with collateral.

On September 17, 2012, the court signed the order granting Regions Bank full relief from the automatic stay and immediate permission to initiate the foreclosure sale of the 2007 Fountain Lightning 47’. This bank was fighting to be paid since 2011 by first initiating the state court lawsuit. They are owed more than $676,000 and will foreclose on collateral worth approximately $300,000. Regions Bank will be left with an unsecured claim of around $376,000 in Mr. Lewis’ bankruptcy case. What happens to their $676,000 general unsecured claim?

Please note that I have only discussed three creditors so far. Mercedes-Benz, Porsche and F.Xavier Regions Bank were fairly straight forward believe it or not. There are least ten creditors to discuss and things get worse, far worse.

Detailed Look and Examination of Ex-NFL Football Player Jamal Lewis’ 2012 Bankruptcy Filing – Part I

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On May 28, 2012, I first wrote an article about Jamal Lewis’ Chapter 11 bankruptcy filing in the Bankruptcy Court for the Northern District of Georgia, Bankruptcy Case Number 12-58938. Unfortunately since then Mr. Lewis’ case has taken a turn for the worse. Mr. Lewis filed the Chapter 11 reorganization case on April 3, 2012. On August 8, 2012, the case was unfortunately converted to Chapter 7, which means liquidation, not reorganization. In Chapter 11 reorganizations it is possible for a person or company with a fair amount of assets or income to reorganize their debts and come out in good shape and still be considered rich by a normal person’s standard. Chapter 7 means liquidation where only a limited amount of the bankruptcy filer’s assets can be protected and the rest are liquidated for the benefit of the people or companies that are owed money. I of course do not know every intimate detail, but it begs the question why did Jamal Lewis’ bankruptcy attorneys file a Chapter 11 reorganization case to begin with when the case was converted to Chapter 7 only four months after it was filed? It appears the reorganization never had a chance. The filing fee and process or reorganizing is extremely expensive in a Chapter 11 case. Especially a case like this one that has sharks circling it to shred it to pieces. As this article examines this case in detail you will discover how difficult it can be to seek a discharge of debts.

Various Parties And General Information About Filing A Bankruptcy Case

1. United States Trustees Office

First and foremost there is the United States Trustee’s Office or the UST, which is part of the Department of Justice. The UST is responsible for overseeing the administration of bankruptcy cases and the private trustees assigned to Chapter 7 and 13 cases pursuant to 11. U.S.C. §586. When a Chapter 11 reorganization case is filed it is assigned to an attorney within the UST’s office to oversee the reorganization. The UST does not take possession or have a right to possession of the assets of the bankruptcy estate though. This is a key difference regarding Chapter 9, 11 or 12 bankruptcy cases. The debtor, or bankruptcy filer, is a debtor-in-possession or DIP. This means the bankruptcy filer is in possession of the assets of the bankruptcy estate. The DIP must obtain court approval to spend assets of the bankruptcy estate to continue to operate a business or fund an individual’s ongoing living expenses. Some critics of this process ask why is the bankruptcy law allowing the assets of the bankruptcy estate to be left and continued to be managed by the entity or person who theoretically caused or contributed to the financial problems to begin with? Arguably the bankruptcy filer whether a person or a company is still has the most knowledge and in the best position to manage the day to day affairs and assets that are part of the bankruptcy estate. Also, the United States Trustee, Bankruptcy Court, Debtor’s attorney and creditors all monitor the use and preservation of property of the estate for the benefit of creditors. Creditors are much more likely to be active or participate in a Chapter 11 reorganization then a Chapter 13 reorganization.

2. Creditors

Creditors are defined by 11 U.S.C. §101(10) which provides that creditors means an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor; entity that has a claim against the estate of the kind specified in section 348(d), 502(f), 502(h) or 502(i) of this title; or entity that has a community claim. Any further explanation and digging into the Bankruptcy Code sections listed here is beyond the scope of this article. Basically creditors are those who are owed money or have a claim for money at the time the bankruptcy case is filed or when the case is converted to another chapter of the Bankruptcy Code. Creditors can attend the meeting of creditors and ask questions of the debtor, file objections to confirmation/approval of the plan of reorganization, seek relief from stay to protect their collateral or even file an adversary proceeding to object to the discharge of the debtor or the dischargeability of the debt or claim owed. Mr. Lewis’ bankruptcy case involves all of the above.

3. 11 U.S.C. §341 Meeting of Creditors and Equity Holder

This section of the bankruptcy code requires that a meeting be held that gives creditors an opportunity to ask questions about the income, expenses, assets and bankruptcy petition filed by the person or entity that filed for bankruptcy protection. Depending upon the circumstances no creditors may choose to attend. If so, then the trustee assigned to the case asks the debtor or responsible individual for a business, questions about the bankruptcy petition, their assets and income to verify information in the bankruptcy petition.

4. Filing a Proof of Claim

For a creditor to be paid money from the bankruptcy estate, if any, the creditor must file a proof of the amount they were owed by the debtor at the time the bankruptcy case was filed. A properly filed proof of claim will include documentation of why the creditor is entitled to be paid and how the amount of the claim was calculated. Federal Rule of Bankruptcy Procedure 3001 provides the required form and content of a valid claim. A proof of claim executed and filed in accordance with the rules shall constitute prima facie evidence of the validity and amount of the claim. If a debtor disagrees with how a claim is calculate an objection to the proof of claim can be filed. The amount of an allowed claim can mean the difference in a plan of reorganization being financially possible or not. Objecting to improperly or invalid proofs of claims filed is an important part of most reorganizations.

5. Unsecured Creditors Committee Counsel

If a Chapter 11 reorganization case is filed with hundreds of creditors there most likely will be the formation of a general unsecured creditors committee and an attorney appointed to represent all the interests of the unsecured creditors. The general unsecured creditors committee is usually comprised of the largest unsecured claim holders and the general unsecured creditors committee counsel is paid from property of the bankruptcy estate just like the attorney for the debtor. It is inefficient for each unsecured creditor to hire and pay individual attorneys to represent their interests. All general unsecured creditors share from the same pool of money, if any, so it is much more efficient to form a committee and pay one attorney to fight on their behalf.

6. Chapter 7 Trustee

When a Chapter 7 case is filed or converted to Chapter 7 from another chapter a Chapter 7 Trustee is assigned to administer the bankruptcy estate that is created. Chapter 7 trustees are independent contractors hired by the United States Trustee’s Office. Chapter 7 trustees are paid from the filing fee paid to file bankruptcy and a percentage of any assets paid out of the bankruptcy estate for the benefit of creditors. As of the writing of this article the percentages Chapter 7 trustees are paid when distributing assets to creditors are as follows: 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.

Why Was The Lewis Case Converted From Chapter 11 to Chapter 7?

There could be many reasons. According to the United States Trustee’s May 4, 2012, motion to dismiss, Mr. Lewis failed to file the mandatory documents pursuant to the United States Trustee’s Operating Guidelines and Reporting Requirements. Mr. Lewis and his bankruptcy lawyer also failed to appear for the Initial Debtor Interview. When filing a Chapter 11 reorganization case there are strict reporting guidelines regarding the monthly income and assets of the bankruptcy filer. The debtor is in possession and control of the assets of the bankruptcy estate, and therefore must provide records of what is taking place regarding the income and assets after the Chapter 11 reorganization case is filed.

After the 341 Hearing It Is Clear Why This Reorganization Case Was Converted To Chapter 7 So Quickly

The United States Trustee filed a supplemental motion to dismiss the case or convert the case to Chapter 7 on June 28, 2012, and the motion paints a much clearer picture as to why this case was converted to Chapter 7 liquidation so quickly. The motion provides excerpts from Mr. Lewis’ testimony at the meeting of the creditors. Mr. Lewis’ schedules listed $14,455,854 in assets with the majority of the value coming from JLew Financial, LLC ($6 million) and Grand Empire, LLC ($5 million). Mr. Lewis testified under penalty of perjury at the meeting of the creditors that the value of his interest in both of these limited liability companies was overstated in the schedules and the values are actually much less. Mr. Lewis’ Schedule D (Secured Debts) included claims exceeding $30 million and Schedule F (General Unsecured Claims) listed claims totaling $871,840.78. The UST believed the unsecured debts listed were much, much more. The Internal Revenue Service filed a claim listing unsecured priority debt owed to the IRS totaling $2,155,829.22 and a claim listing a general unsecured claim totaling $172,590.45. Mr. Lewis’ schedules listed the amount owed to Georgia Department of Revenue as $0.00, but the Georgia Department of Revenue filed a mostly priority tax debt claim totaling $1,619,742.41. So basically Mr. Lewis’ assets were actually far less than represented and his debts were far more than represented. To make matters worse Mr. Lewis testified that his income was far less than was his petition listed of $35,000 per month. The two most common ways to reorganize debts are either to make it happen through your income or sale of your assets. So that is that. No assets and no income with over $30 million in secured debt with collateral to be foreclosed on or repossessed and $3,775,571.60 in unsecured priority tax debt that is not dischargeable. The feasibility or possibility of a successful reorganization of Mr. Lewis’ debts is extremely low if not arguably impossible given these asset, income and debt figures. Therefore, after a mere four months after filing a Chapter 11 reorganization case Mr. Lewis’ consented to his case being converted to a Chapter 7 liquidation of this assets.

It is really difficult to speculate as to why Mr. Lewis filed a Chapter 11 case under his financial circumstances. The possibilities range anywhere from not wanting to believe he is going to basically lose it all by filing a Chapter 7 case to begin with, or misinformation about the process or the possible outcomes. From the outside looking in it is very easy to make assumptions and point fingers about what took place and why. The only real way to know the truth is if you were in the room when Mr. Lewis and his bankruptcy attorneys discussed his options, what to do about it and when. Part II of this article sheds light on Mr. Lewis’ case now that it is converted to a case under Chapter 7 of the Bankruptcy Code and the addition of the Chapter 7 trustee.

Inside the Chapter 7 Bankruptcy Liquidation of Juno Baby, Inc.

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Back in January of 2013 I wrote an article about the unfortunate filing of Chapter 7 bankruptcy by Juno Baby, Inc. Juno Baby, Inc. filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on December 21, 2012, Bankr. Case No. 12-33574. So what is going to happen to Juno Baby, Inc. and its intellectual property?

On February 28, 2013, the Chapter 7 trustee assigned to liquidate the remaining assets of Juno Baby, Inc. filed a motion pursuant to section 721 of the bankruptcy code to operate the business while it is liquidated. Section 721 provides that the court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate. No opposition to the trustee’s motion was filed. The Chapter 7 trustee requested approval to run Juno Baby, Inc. given that products of Juno Baby, Inc. were still being sold by Amazon.com. The proceeds from those sales are part of the bankruptcy estate and must be preserved for the benefit of creditors of Juno Baby, Inc.

On October 1, 2013, the Chapter 7 trustee’s Bankruptcy Attorneys filed a motion to sell the intellectual property of Juno Baby, Inc. According to the motion the intellectual property of Juno Baby, Inc. was sold to Super Pig Entertainment, LLC for $22,500. The motion further provides that Super Pig Entertainment, LLC, is a company owned by one of the co-founders of Juno Baby, Inc. At the time of the bankruptcy of Juno Baby, Inc. the co-founders did not own the corporation anymore. The original co-founders sold Juno Baby, Inc. in 2009. On December 6, 2013, the Chapter 7 trustee filed an amended motion to sell the assets of Juno Baby, Inc. to clarify exactly what is being sold to Super Pig and what is not. The amended motion provides in part: “Pursuant to the Amended Sale Agreement, the Purchaser is purchasing all of the assets of the Debtor [Juno Baby, Inc.], including, without limitation, all copyrights, trademarks and other intellectual property, but not including all cash in the Debtor’s bank accounts, all proceeds of sales of the Debtor’s inventory deposited into the Debtor’s bank accounts on or before August 31, 2013, a State Board of Equalization refund in the amount of $13,926 received by the Trustee, and a potential Travelers Insurance Company refund scheduled by the Debtor in Schedule B in the Debtor’s bankruptcy case with an unknown valuation. The sale price for the assets is $22,500 which has been received by the Trustee.”

Juno Baby, Inc.’s bankruptcy schedules list $352,816 in assets and $6,913,903.00 in unsecured debts. Most of the assets are in the form of inventory totaling $331,806.00. So with the addition of the $22,500 in intellectual property funds received and the $13,926 for the BOE, the total available to creditors is approximately $368,232.00 (estimate only based upon court filings). Of course this is not counting the funds received from sales of product on Amazon.com, deducting the Chapter 7 trustee fee, Bankruptcy Attorney fees and accounting fees from the total. Juno Baby, Inc.’s creditors will be lucky if they receive a 5% distribution (5 cents for every dollar owed) from the bankruptcy estate of Juno Baby, Inc. That is also assuming that the inventory of $331,806.00 is even worth that.

Are Banks Allowed to Freeze My Bank Account After Filing Bankruptcy?

By Ryan C. Wood

There are NOT several banks that choose to freeze their customer’s bank accounts if their customers file for Chapter 7 bankruptcy.  There is only one and that nefarious bank is Wells Fargo Bank.  Why would Wells Fargo Bank freeze the money their customer needs to feed their children or pay their rent when filing for Chapter 7 bankruptcy?  How can that be good for business?  It should not be good for business yet people still choose to do business with Wells Fargo Bank.  It is like Walmart.  Walmart receives all kinds of government tax breaks and subsidies yet Walmart does not pay their employees well in light of billions of dollars in quarterly profits.  So many people complain about how Walmart pays their employees yet still shop at Walmart perpetuating the harm and encouraging it.  Same is true of Wells Fargo Bank.

Why Freeze Bank Accounts When Filing Chapter 7 Bankruptcy?

The bank’s reasoning is that they are freezing the bank accounts to preserve the bankruptcy estate, and will release the funds once the trustee authorizes the turnover of the funds back to the bank customer.  The problem is, the trustees have huge caseloads, and they may not be able to send a letter to the banks immediately to release the funds.  Also certain trustees choose to not get involved at all.  Until the trustee sends a letter of release to a bank, the customers’ bank accounts remain frozen.  This is a huge problem, especially if that is your only bank account, and you have bills that need to be paid, like mortgage payments and utility bills.  The bills will remain unpaid until the bank account is released, and in the meantime, you may end up being evicted or have your power turned off.

The bank’s method of freezing their customer’s accounts was challenged in Mwangi v. Wells Fargo Bank, N.A.  In Mwangi, the Mwangis’ had several bank accounts with Wells Fargo, and Wells Fargo was also a creditor in the Mwangi bankruptcy case.  Wells Fargo placed an administrative freeze on Mwangi’s bank accounts after it found out the Mwangis filed for bankruptcy.  Mwangi demanded that the exempted portion of the funds in their bank accounts be released, but Wells Fargo refused.  The bankruptcy court concluded that Wells Fargo’s policy did not violate the automatic stay because the funds were part of the bankruptcy estate and Wells Fargo was not attempting to collect a debt; they were only placing an administrative freeze on the bank account to preserve the bankruptcy estate until further notice.  Well, as most bankruptcy lawyers can attest to, most bank account money is exempted/protected so teh bankruptcy filer keeps the funds and can use the funds to eat and live.  

The case then went to the 9th Circuit Bankruptcy Appellate Panel (BAP).  The BAP consists of a group of judges under the supervision of the US Court of Appeals who are appointed to hear appeals from bankruptcy cases.  The BAP disagreed with the lower bankruptcy court’s decision.  It distinguished the Mwangi case from Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  In Strumpf, the Supreme Court held that banks may place administrative freezes on a debtor’s bank account while the bank pursues relief from the automatic stay to exercise its right of setoff against the account.  In Mwangi, the freeze was not held to assert any right to a setoff that Wells Fargo had; it was a blanket policy that froze the accounts of all customers that filed for bankruptcy.  The BAP held that the administrative freeze Wells Fargo placed on Mwangi’s accounts was considered a violation of the automatic stay pursuant to 11. U.S.C §362(a)(3), which provides “…a petition filed under section §301, 302, 303 of this title… operates as a stay, applicable to all entities, of…any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate…”  By holding an administrative freeze on Mwangi’s account, Wells Fargo was exercising control over Mwangi’s property, despite Wells Fargo’s objections otherwise.  The BAP said, “Wells Fargo could have paid the account funds to the trustee; it did not.  Wells Fargo could have released the account funds claimed exempt to the Appellants when demand was made; it did not.  Wells Fargo could have sought direction from the bankruptcy court….it did not.  Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate.  If that is not “exercising control over” the funds, we don’t know what is.”  Mwangi v. Wells Fargo Bank, N.A., BAP No. NV-09-1408-DHPa, 09-24057-BAM 2010 WL 2723204 (9th Cir. BAP. June 30, 2010).  The BAP reversed the bankruptcy court’s decision and remanded the case back to the bankruptcy court.

Wells Fargo then tried to appeal the case to the 9th Circuit Court of Appeals.  However, on December 10, 2010, the 9th Circuit Court of Appeals dismissed the case due to lack of jurisdiction.

Hopefully you will retain an experienced bankruptcy attorney that properly advised you about your bank accounts and filing for bankruptcy.  The moral of the story:  do not have your bank accounts at bank you also owe money with credit cards, vehicle loans or home mortgages.  There are no shortages of banks for you to choose from in your area that would be convenient for you to bank with – just choose one where you don’t owe any money to.  Always keep your bank account accounts separate from your debts.