Arizona Bankruptcy Lawyers

Monday, December 31, 2012

Chapter 12 Bankruptcy for Farmers

     When lawyers talk about the types of bankruptcy available, we usually focus on the three most common types of bankruptcy – Chapter 7, 11, and 13.  However, there are a few others, including Chapter 12, which is available for “family farmers” or “family fisherman.”  Although Arizona has few, if any, “family fisherman,” there are over 15,000 farms in Arizona, so Chapter 12 bankruptcies are filed in Arizona from time to time. 
     For purposes of the Bankruptcy Code, an individual or a married couple is a “family farmer” if they are engaged in a farming operation, their debts do not exceed $3,792,650, at least 50% of their debts are related to the farming operation, and more than 50% of the income from the previous tax year (or for each of the 2nd and 3rd prior tax years) came from the farming operation.  A corporation or partnership may qualify as a “family farmer” if more than 50% of the stock or equity in the corporation or partnership is owned by one family and that family operates the farm.  More than 80% of the value of the corporation or partnership assets and at least 50% of the corporation or partnership debts must be related to the farming operation and the total debt may not exceed $3,792,650.
     Chapter 12 is a reorganization with similarities to both Chapter 11 and Chapter 13.  As in a Chapter 13, a trustee is appointed whose job it is to evaluate the case, collect payments from the debtor, and make distributions to creditors.  Within 90 days after a Chapter 12 bankruptcy is filed, a plan of reorganization must be filed.  The plan will propose to make payments over a 3 to 5 year period and must be approved by the bankruptcy court.  How a creditor is to be treated in a Chapter 12 plan depends on the type of claim the creditor holds.  Priority claims, such as most taxes and the administrative costs of the bankruptcy, must be paid in full by the plan.  Secured claims must be paid at least the value of the collateral securing the claim, but such claims may be paid over a longer period than five years in some cases.  General unsecured claims must receive at least as much as they would receive in a Chapter 7 liquidation, which is often nothing.    
     After completion of all plan payments, the debtor will receive a discharge of all remaining debts, with limited exceptions.  For more information about the bankruptcy discharge, click here.

Thursday, December 20, 2012

In re Skinner – Inference of Fraud in Nondischargeability Action

     On December 13, 2012, Judge Marlar issued a memorandum decision in In re Skinner, 2012 Bankr. LEXIS 5782 (Bankr. D. Ariz. 2012) in which he found that the debtors’ actions in failing to even attempt to make good on a promise to pay, coupled with the debtors’ clear inability to live up to the promise, warranted an inference of intent to deceive in an action to determine the non-dischargeability of a particular debt. 
     The debtors sold a classic car to the plaintiffs for $12,000 plus two lots of real property.  The debtors agreed to pay off the existing liens of $33,000 on the vehicle in order to convey clear title to the plaintiffs.  The debtors received the $12,000 from the plaintiffs and sold the two lots for $20,000, but did not use any of the money to pay down the liens.  In fact, the debtors increased the liens against the vehicle to $60,000.  The debtors eventually defaulted and the vehicle was repossessed.  The plaintiffs were awarded a default judgment in state court prior to the debtors’ bankruptcy filing and sought in the bankruptcy to have the debt declared non-dischargeable.
     Section 523(a)(2)(A) provides that a monetary debt is not dischargeable to the extent obtained by “false pretenses, a false representation, or actual fraud.”  A claim of non-dischargeability under section 523(a)(2)(A) requires the creditor to demonstrate five elements:  “(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of the statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on  the debtor's statement or conduct.”   In re Slyman, 234 F.3d 1081, 1085 (9th Cir. 2000).
     The court noted that proving knowledge and intent to deceive is inherently difficult, but that those elements “may be inferred by circumstantial evidence and from debtor’s conduct.”  The court found that the debtor “made a representation that was so far beyond his financial reality as to be deceptive, and that, when made, he knew that he either could not or would not perform his promise to quickly pay off the underlying . . . lien on the vehicle.”  That clear inability to pay, coupled with the fact that the debtor did not use even a single dollar to pay off the liens evidenced to the court the intent to deceive necessary for a finding of non-dischargeability under section 523(a)(2)(A).

Wednesday, December 19, 2012

In re Jones – Property acquired by “devise”

     In In re Jones, 2012 Bankr. LEXIS 5769 (Bankr. D. Ariz. 2012), decided by Judge Curley on December 13, 2012, the court held that real property that was acquired by the debtor through a beneficiary deed within 180 days after the bankruptcy was filed was property of the bankruptcy estate pursuant to section 541(a)(5) of the Bankruptcy Code.
     The debtor’s grandmother executed a beneficiary deed in favor of her grandson, which conveyed her home to the debtor effective upon her death.  The grandmother died just three days after the debtor filed bankruptcy.  The bankruptcy trustee filed a motion to sell the home free and clear of liens and the debtor objected, arguing that the home was not property of the bankruptcy estate.
     Section 541(a)(5)(A) of the Bankruptcy Code provides that property of the bankruptcy estate includes property that is acquired within 180 after the bankruptcy is filed “by bequest, devise, or inheritance.”  Neither party disputed the fact that the property was acquired within 180 after the bankruptcy was filed.  Nor did the parties dispute that the property was not acquired by bequest or inheritance.  The question for the court, therefore, was whether the property was acquired “by devise” pursuant to Arizona law.
     The Arizona Probate Code defines “devise” as follows:  “when used as a noun, means a testamentary disposition of real or personal property and, when used as a verb, means to dispose of real property by will.”  ARS § 14-1201.  Although the debtor argued that the word “devise” was used as a verb in section 541(a)(5)(A), the court found that it was clearly used as a noun, since it’s the subject of a prepositional phrase.  Thus, even though the property did not pass to the debtor through a will, the Court held that the beneficiary deed was a “testamentary disposition” and was therefore a “devise” under the broader meaning given to that term when used as a noun.     
     The court also found, as an alternative basis, that the property was property of the bankruptcy estate under section 541(a)(1), which defines property of the estate as including “all legal or equitable interests of the debtor in property as of the commencement of the case.”  The court reasoned that the debtor had a contingent interested in the property on the petition date, which was transformed into a full ownership interest upon the death of the debtor’s grandmother.

In re Sunnyslope Housing – Low Income Housing Tax Credits

     On December 12, 2012, Judge Haines issued a memorandum decision in In re Sunnyslope Housing Limited Partnership, 2012 Bankr. LEXIS 5726 (Bankr. D. Ariz. 2012) concerning the value of Low Income Housing Tax Credits.  The court had previously found the value of a secured creditor’s interest in its collateral for purposes of section 506(a) of the Bankruptcy Code, which provides that a creditor has a secured claim up to the value of the collateral and an unsecured claim to the extent the debt exceeds the value of the collateral.  In determining the value of the collateral, the court did not include the value of Low Income Housing Tax Credits (“LIHTCs”) to which the debtor was entitled.  On appeal, the District Court affirmed in part, but reversed and remanded for a determination of the value of the LHITCs to be included as part of the value of the collateral under section 506(a).
     The bank’s expert placed the value of the LIHTCs at $2.96 million, while the debtor’s expert placed the value at $26,144.  The court found that, while neither expert’s ultimate determination of value was persuasive, the best evidence of the value was $1.3 million, using the debtor’s expert’s discounted cash flow analysis.
     For more information about Low Income Housing Tax Credits, click here.

In re Cunningham – stating a non-dischargeability claim

     In a decision designated “for electronic publication only,” Judge Curley held on December 5, 2012 that a non-dischargeability complaint would survive a motion to dismiss where the plaintiff’s allegations related to the debtors’ alleged concealment of material facts, rather than actual representations.  In re Cunningham, 2012 Bankr. LEXIS 5655 (Bankr. D. Ariz. 2012).    
     In In re Cunningham, the debtors purchased a home and executed a promissory note and deed of trust, but later sold the home to a third party using carry-back financing in which the buyer made payments to the debtors and the debtors used the payments to pay the original lender.  Two years later, the third party refinanced the property and the debtors were paid in full, but the debtors did not use the funds to pay off the original lender.  Rather, they retained the funds and continued to make payments on their note.  Eventually, both the debtors and the third-party defaulted on their obligations and a title company was required to pay off the original lender in order to release the lien.  The title company filed a complaint against the debtors to have the debt declared non-dischargeable in the debtors’ bankruptcy.  The debtors filed a motion to dismiss the complaint for failure to state a claim upon which relief could be granted.
     Section 523(a)(2)(A) provides that a monetary debt is not dischargeable “to the extent obtained by false pretenses, a false representation, or actual fraud.”  The plaintiff alleged that the debtors committed fraud by concealing two material facts:  (1) that the debtors concealed the transfer of the property from the original lender and (2) that the debtors failed to disclose and concealed the refinancing and the debtors' subsequent receipt of funds. The plaintiff argued that a concealment of material facts is no different than a misrepresentation. The court held that the plaintiff had met its burden and denied the motion to dismiss.
     The court examined two cases.  The first was Field v. Mans, 157 F.3d 35 (1st Cir. 1998), in which the court reasoned on very similar facts that, while the original granting of credit was not fraudulently induced, the debtor had obtained an “extension of credit” because an acceleration clause gave the creditor the right to call the note due or demand payment from the debtor after the unauthorized sale. The second opinion examined by the court was In re Demarest, 176 B.R. 917 (Bankr. W.D. Wash. 1995) aff’d 124 F.3d 211 (9th Cir. 1997).  In that case, the title company mistakenly failed to pay off a lender at closing and the debtors received $65,000 in excess of what they should have received.  The debtors deposited the check and continued making monthly payments.  The court in Demarest reasoned that  silence may create a false impression, providing the basis for a misrepresentation that is actionable under section 523(a)(2)(A).

In re Schayes – principal residence of Chapter 11 debtors

     Section 1123(b)(5) of the Bankruptcy Code prevents a debtor from modifying claims that are secured only by the debtor’s “principal residence.”  In In re Schayes, 2012 Bankr. LEXIS 5598 (Bankr. D. Ariz. 2012), decided by Judge Haines on December 4, 2012, the court held that a home that the debtors purchased for investment purposes but which was their only residence on the petition date was the debtors’ “principal residence” for purposes of section 1123(b)(5). 
     The debtors purchased the subject property in 2007 and lived in the property for one year as required by the original financing contract.  The home was vacant from 2008 until February 2011 when the debtors moved back into the property.  The debtors filed their Chapter 11 bankruptcy petition in July 20, 2011.  The debtors continued to live in the home.
     The debtors argued that the property should not be deemed their principal residence for purposes of § 1123(b)(5) because they never intended to use it as their principal residence. They argued that their only intended use of the property was to rent it out to generate income and that they moved into the property solely for the business purpose of putting the property into a rentable condition and protecting it from further deterioration until it could be rented. Their proposed Chapter 11 plan provided that they would move out of the property and the property would then be rented. The debtors argued that that their intention rather than their actual use should be determinative for purposes of § 1123(b)(5).
     However, the court noted that the Bankruptcy Code does include a definition for a principal residence. Section 101(13A) defines the term "debtor's principal residence" as: "a residential structure if used as the principal residence by the debtor, including incidental property without regard to whether that structure is attached to real property.”  The court concluded that “the definition of ‘principal residence’ in § 101(13A) unambiguously hinges on how the debtor actually uses the structure, not the debtor's intentions at any point in time.”
     The court noted the suggestion of an uncodified “multi-use exception” to section 1123(b)(5).  See In re Scarborough, 461 F.3d 406, 411 (3d Cir. 2006) (“the real property that secures the mortgage must be only the debtor’s principal residence in order for the anti-modification provision to apply”). However, the court distinguished Scarborough and similar cases, noting that, “[t]he basis for the uncodified exception in each of these cases was a multiple actual use of the property, not a single actual use as the debtor's principal residence coupled with another intended or hypothetical use.”

In re Assyrian Babylon, LLC – feasibility of Chapter 11 plan

     In In re Assyrian Babylon, LLC, 2012 Bankr. LEXIS 5589 (Bankr. D. Ariz. 2012), decided by Judge Marlar on December 3, 2012, the court held that a chapter 11 plan of reorganization was feasible despite the fact that the debtor business had to essentially start over at a new location. 
     The debtor operated a sports bar in Yuma, Arizona.  A fire had occurred prior to the bankruptcy that left a portion of the premises uninhabitable.  During the bankruptcy proceeding, a remodeling dispute arose between the debtor and its landlord and major creditor which ultimately lead to the court ordering the debtor to vacate the premises in June 2012.  Just a few weeks later, on August 2, 2012, the debtor filed a plan of reorganization to which the creditor objected based on feasibility grounds.
     The court noted the six factors to be considered when evaluating the feasibility of a plan:  (1) the adequacy of the capital structure; (2) the earning power of the business; (3) economic conditions; (4) the ability of management; (5) the probability of the continuation of the same management; and (6) any other related matters which determine the prospects of a sufficiently successful operation to enable performance of the provisions of the plan.  The court also noted that there was no operating history at the new location to which the debtor intended to relocate and that the amount of new capital being infused into the venture was “thin.”  However, the court found that the debtor had met its burden of proof on feasibility.  The court stated that, “we are dealing with a fairly small business that has successfully operated in the past” and, “[a]lthough legitimate differences of opinion exist over the thin amount of new capital being infused, and recognizing that, while more may be better, less is not fatal to feasibility.”