Judge’s Decision Clears Way for Stockton’s Chapter 9 Bankruptcy
Judge Klein of the U.S. Bankruptcy Court (ED California) has allowed the city of Stockton, California to proceed with its chapter 9 bankruptcy case filed last June. Stockton, a city of around 300,000 residents, is the largest city ever to file for chapter 9 bankruptcy protection. The city’s creditors asked Judge Klein to dismiss the case, arguing that the city was acting in bad faith as it sought bankruptcy protection to reduce its debt obligations to creditors while fully satisfying its obligations to CalPERS, the California Public Employees Retirement System, which manages city workers’ retirement money. The city owes some $900 million to CalPERS in order to cover its pension obligations.
Judge Klein disagreed with the creditors and declined to dismiss, finding that the city was indeed insolvent and needed bankruptcy protection in order to perform the basic functions of a municipal government. The judge also said in the ruling that it was the creditors who had acted in bad faith, presumably referring to the fact that creditors reportedly refused to negotiate in mediation — as required by bankruptcy law — unless the city cut payments to CalPERS. They also refused to pay for some of the costs of the mediation.
Stockton is required by California law to fund its pensions, so the potential conflict between this state law and US bankruptcy law is the key issue that observers (most notably the $3.7 trillion municipal bond market) will be keeping a close eye on as the case unfolds. Since many other cash-strapped cities have similar issues with pension funds, this could set an extraordinary precedent for other cities who may want to follow suit and proceed with chapter 9 protection to restructure their debts. However, the city must still come up with a debt restructuring plan that must be approved by the judge; the creditors can also object to the plan, which they fully intend to do. While Judge Klein ruled that Stockton’s decision to continue payments to CalPERS while neglecting others was not improper, he did acknowledge that the question of how CalPERS will be treated in the city’s proposed repayment plan is a “serious issue” that will be dealt with in the plan negotiation phase.
Bankruptcy in the News: Girls Gone Wild Files for Chapter 11
Last Wednesday, Girls Gone Wild, the adult entertainment franchise with the memorable late night infomercials filed for Chapter 11 bankruptcy protection. According to reports, the company filed for bankruptcy protection in an attempt to prevent Wynn Las Vegas from collecting on a debt worth $10.3M as part of a lawsuit against Girls Gone Wild founder Joe Francis. The debt stems from an award against Francis in which a jury determined that Francis’s claim that Steve Wynn threatened to kill him arose to defamation.
Francis has had his share of legal troubles over the years including:
1. In 2003, officials attempted to halt Girls Gone Wild filming. Francis sued claiming violation of his 1st Amendment rights. During the same period Francis was arrested on racketeering charges. Although some of the charges stemming from this case were dismissed, Francis eventually pled guilty to record-keeping violations and was fined $1.6M.
2. A suit in 2007 where Ashley Alexandra Dupre alleged that Mr. Francis’s company used her images without her permission. Ms. Dupre dropped the suit when Francis showed footage where she agreed to be filmed.
3. Also in 2007, Francis was indicted by a federal grand jury on two counts of tax evasion. Francis initially pled not guilty, but in September 2009 pled guilty to lesser misdemeanor counts. Mr. Francis ended up paying $250,000 restitution to the IRS as a result of the case.
4. In 2008, Girls Gone Wild was sued by four women who alleged the company filmed them while they were underage. The jury found in Francis’s favor.
5. In February 2012, a Nevada Judge awarded Steve Wynn $7.5M for the defamatory statements mentioned earlier. In September of that same year, a jury awarded Wynn $20M in a related slander case. However, two months later another Nevada Judge reduced Wynn’s award.
In short, this is just the latest of Francis and Girls Gone Wild’s legal troubles. However, he remains defiant. A Girls Gone Wild spokesman claims that the company remains strong financially and that “the only reason Girls Gone Wild has elected to file for this reorganization is to re-structure its frivolous and burdensome legal affairs.” The spokesman further stated that “this Chapter 11 filing will not affect any of Girls Gone Wild’s domestic or international operations. Just like American Airlines and General Motors, it will be business as usual for Girls Gone Wild.” We shall see if the spokesman is correct or if this portends something a bit more serious for Girls Gone Wild. Check our LawBlog for further updates on the case.
Here at MPS, 0ur attorneys represent clients in the Denver, CO, Portland, OR, and Colorado Springs, CO areas where we specialize in obtaining a fresh financial start for you or your company. Contact us today to schedule a free consultation.
MPS Expands Denver Office, Adds Andrea Vella, Esq
DENVER, CO (Feb. 22, 2013) — The law firm of McFarland Pyle & Stone LLC welcomes Andrea Vella, Esq. to its Denver office.
“Andrea’s experience as a litigator and trial counsel will broaden the resources available to our clients not only in Denver, but also Colorado Springs and Portland, Oregon. She’ll be an asset to the firm’s existing clientele and allow MPS to counsel clients on a wide range of issues,” said Roy McFarland, managing partner of the firm’s Denver office. “Plus, she passed the New York State Bar Exam which gives our firm an entree to the East Coast.”
Andrea was born and raised in Colorado. She attended the University of Denver for her undergraduate degree, majoring in International Business. While at DU, Andrea spent a summer abroad working as a Sous Chef in a small town called Villard de Lans located outside of Grenoble, France.
After graduating from DU, Andrea attended law school in Albany, New York, where she clerked for the New York State Assembly Minority Counsel during both the 2010 and 2011 legislative sessions. She also participated in a study abroad program traveling to Geneva, Paris, London and Brussels, focusing on International Human Rights and International Economic Law. Realizing how much she missed Colorado, Andrea returned after passing the Bar Exam in New York. Upon passing the Colorado Bar, she joined MPS in November 2012. In her spare time, Andrea enjoys reading a good book, cooking, and traveling. She also loves to play outside with her two dogs, Louie and Brody.
Please join MPS in welcoming Andrea!
Immigration Law in the News: Immigration Reform, the Senate and President Obama Lay Out Their Plans
If immigration reform eventually passes—and it looks like it has a good chance to do just that—last week will forever be seen as the week when the tide finally and officially turned. There is, for the first time in almost a decade, bipartisan support for reform.
While Democrats look at immigration reform as primarily an economic and human rights issue, Republicans, according to Sen. McCain, were ultimately brought to the table as a result of the crushing electoral defeat they suffered in November. As is well known by now, Republicans have a huge demographic problem. Years of demonizing immigrants came back to haunt them in 2012 as it did in 2008 when Latinos overwhelmingly turned out in favor of President Obama. The President is now fulfilling his campaign promise and repaying their trust with his full-throated push for reform. Whatever reasons each side cites as its impetus, the simple fact is both sides are now pushing for immigration reform. It reamins to be seen what reform will eventually look like, but last week’s developments can only be seen as a step in the right direction for reform advocates.
Last Monday, a bipartisan group of eight Senators comprised of Sen. Marco Rubio, R-FL; Sen. John McCain, R-AZ; Sen. Lindsey Graham, R-S.C.,; Sen. Jeff Flake, R-AZ; Sen. Chuck Schumer, D-N.Y.; Sen. Robert Menendez, D-N.J.; Sen. Michael Bennet, D-CO and; Sen. Richard Durbin, D-IL laid out a plan that couples immigration reform with enhanced security efforts aimed at preventing illegal immigration and ensuring that those foreigners here temporarily return home when their visas expire. Their plan includes:
- Path to citizenship coupled with border security.
- Reform of the legal immigration system.
- Reform of the employment verification system.
- Improved process for admitting future workers.
On Tuesday, in front of a friendly crowd in Las Vegas, the President laid out his plan for immigration reform to chants of, “Si se puede!” In his plan, President Obama called for common sense and comprehensive immigration reform emphasizing:
- Continued focus on enforcement.
- Dealing with the 11 million undocumented in the country.
- Bring the legal immigration system into the 21st Century.
The President also cited his renewed support for the Dream Act as part of his call for action on reform.
The recent developments have, undoubtedly, given tremendous hope to the estimated 11 million undocumented people currently living and working in the United States and those who are potentially planning to come to study, live, and work in the United States. Not only is President Obama fulfilling his election promise to tackle the issue, but there seems to be significant and meaningful bipartisan support—at least in the Senate. It remains to be seen how the more conservative and intransigent House Republicans will respond to the proposals. Initial resistance is likely, but as they did on the Fiscal Cliff deal and the Debt Ceiling, it’s likely enough House Republicans will join with House Democrats to pass reform. We’re not predicting an easy journey, but we do think reform will eventually pass. As President Obama said, “Now’s the time.”
Although the news in Washington is coming thick and fast, especially the battles over the President’s Cabinet nominations, we will be sure to follow immigration reform developments closely and update our blog regularly as the situation develops. Right now the proposals are in the early stages and lack defined proposals. As legislation develops, we will convey what that information means to you.
At MPS, we know navigating the immigration process is difficult. And right now, it is especially confusing given all of the uncertainty. Contact us and we can help you along your journey.
When Must I Start Paying My Mortgage in Chapter 13 Bankruptcy?
One of the main reasons to file chapter 13 bankruptcy is to save your house from foreclosure. If you are doing a “save your house” chapter 13 bankruptcy, then you are probably behind on your mortgage payments. To save your house in a Colorado chapter 13 bankruptcy, you must do two things:
- Restart paying your contractually due mortgage payment, and
- Propose to cure your mortgage arrears (back payments) in your chapter 13 plan.
In a Colorado bankruptcy the debtor is responsible for paying the mortgage directly, unlike some states that have the debtor pay the bankruptcy trustee both the mortgage payment and the chapter 13 plan payment.
So, in a Colorado chapter 13 bankruptcy, the debtor must start paying the mortgage payment on the next due date after the case is filed. Most mortgage payments are due the 1st day of the month; so, if your attorney files your chapter 13 bankruptcy on March 5th, the debtor must pay the next mortgage on or before April 1. If the debtor fails to make that mortgage payment, the debtor will again be in default of the mortgage and risks foreclosure.
In chapter 13 bankruptcy, if the debtor desires to keep their home and is behind on payments, the debtor must pay the regular mortgage payment the next due date after the chapter 13 bankruptcy case is filed.
By Matt Berkus
Bankruptcy Is About Forgiveness; Bankruptcy is Moral!
The idea of debt forgiveness goes back thousands of years. The Old Testament provides that lenders shall forgive debt every 7 years; Deuteronomy15, 1-11. The interesting thing to note about that passage is that the text places the moral duty on the lender. It was part of a lender’s moral or ethical code to forgive debt every 7 years. Where has that moral duty gone today?
Conceptually, modern bankruptcy law is how we hold financial institutions to that moral code. However, laws and regulations are poor substitutes for genuine moral obligation and courage; hence, why we have lost the idea that bankruptcy is really about forgiveness. Today, bankruptcy is often viewed as a mechanism for debtors to break promises and break agreements; hence the perceived stigma about bankruptcy, the guilt felt by those who need bankruptcy and the continued suffering of those with debt because they can’t bring themselves to file bankruptcy.
I refer to this dilemma as the moral dis-equivalence between debtor and lender. Society and our leaders have stripped away nearly all moral requirements on lenders; but society seems to shame those that need bankruptcy, that need forgiveness of debt. Shame and guilt are emotional reactions to a perceived violation of some duty. But violating a duty requires a voluntary act to be morally blameworthy. I have yet to meet or represent a client that intentionally got in to debt with the express purpose of not paying it back. Doing so would be clearly wrong and there are civil and criminal laws to deal with that situation. Bankruptcy is about forgiving the “unfortunate debtor.” Bankruptcy is almost always caused by external forces or events that are beyond the debtor’s control (job loss, bad economy, wrong business at the wrong time, bad luck, severe accident or illness). If you make a promise to see your grandmother at 6:00pm, but get in a car accident along the way and do not arrive to see your grandmother, have you broken a promise? Are you morally responsible and blameworthy for not keeping that promise? Your grandmother, and anyone, would forgive you.
So, why don’t we hold lenders responsible for forgiving debt? Can you really imagine our country without bankruptcy; without a credible mechanism for debt forgiveness? Who would start small businesses that employ most Americans? Without bankruptcy, the risk would be too great? What would happen to those burdened with extreme medical debt? Bankruptcy is how we keep individuals and families contributing members of society; it allows individual to take risks and open businesses because bankruptcy provides an exit if things don’t go as planned. Bankruptcy is the floor that keeps people out of the basement of lifelong poverty and allows them to pick themselves up. Did you know that most successful business people have filed bankruptcy at some point? No one sets out to fail; bankruptcy is an expression of forgiveness; bankruptcy is moral.
By Matt Berkus
Do I Lose Frequent Flier Miles If I File Bankruptcy?
As a practical matter, most likely yes. If you have a credit card that provides frequent flier miles or points and you file bankruptcy, you will lose those miles or points.
Whether you keep or lose the points is up to the lender. Bankruptcy doesn’t force the issue, but every lender I have encountered has a policy/clause in its credit agreement that if the debtor defaults or files bankruptcy, the lender can revoke the miles or points.
Even if the card has a zero balance when you file bankruptcy, you will still lose the miles. As such, there is no benefit to trying to pay-off that card prior to filing bankruptcy. To answer your next question, you cannot pick and choose which creditors to include in your bankruptcy. You are not allowed to file bankruptcy against all your other creditors and exclude your miles card.
Moreover, it is highly unlikely that a bankruptcy judge would approve a reaffirmation agreement if the sole reason for doing so is to keep the miles. But again, the issue is up to the lender, and I haven’t encountered a lender willing to entertain a reaffirmation agreement to retain miles.
You should not allow this question to determine whether or not to file bankruptcy, but you should be aware that if you accumulated miles or points on a credit card, you will lose them if you file bankruptcy.
By Matt Berkus
The Role of the Bankruptcy Trustee, Don’t be Fooled
Individuals first looking into bankruptcy, most pro se debtors, and even new bankruptcy attorneys tend to misunderstand the role of the bankruptcy trustee; and therefore do not realize the available options for dealing with a hostile trustee.
The bankruptcy trustee is the debtor’s enemy in the bankruptcy case. The U.S. court system, in all aspects, is adversarial in nature. Bankruptcy is no exception. In any case, including a bankruptcy case, two sides oppose each other. The debtor is seeking a discharge of debts; your creditors are seeking to get any money they can. The trustee is appointed, for administrative efficiency, to represent the collective interests of the debtor’s creditors. Reason being, it would be too administratively cumbersome to have to address the claim of each creditor individually. The bankruptcy trustee is trying to get money from you to pay something to your creditors. The trustee is not your friend and the trustee is not an objective third party.
The good news is this; the trustee is your adversary, which means the trustee is not the decision maker in your case. I see so many forum posts and questions about the trustee did this, the trustee did that? My first response is why didn’t you oppose that action? The answer I get back; I didn’t know I could.
If you don’t like something the bankruptcy trustee did, or if you oppose the trustee on some issues, you don’t have to lie down and take it. Bankruptcy is still a court proceeding and a judge presides over the case. In 99% of case, the debtor will never see the judge. However, if you need to resolve a dispute, the judge is the arbiter and the decision maker.
Granted, you need to have some basis to support your position against the trustee. If you disagree with a trustee’s actions, go to the judge and have the judge tell you whether the action is right or wrong.
Bankruptcy Pre-Planning, Know The Asset Value!
The number one question of most prospective bankruptcy clients is this: “Will I lose X if I file bankruptcy?” Generally, most debtors that file chapter 7 bankruptcy lose nothing in bankruptcy, but losing assets is one of the biggest bankruptcy fears.
To intelligently answer the question, “will I lose X”, we need to know how much the thing is worth. Asset value is the key to bankruptcy pre-planning. Pre-planning encompasses two considerations, (1) practical and (2) legal. The practical consideration is two fold; first, is the item worth enough to expend the brain power on a legal analysis and developing an elaborate asset protection plan; and second, does the debtor even care about the item and whether the item is lost in the bankruptcy. For example, if the debtor’s third vehicle is a 1979 Chevy Blazer that is mostly rusted and sitting on blocks, the vehicle is not worth any ones time and effort in the bankruptcy system to take even if there is no way to protect the vehicle in bankruptcy, or the debtor may not care and beg the trustee to take the Blazer off his hands. So, there is no need for the debtor to spend any time or money to figure out what do so with the item.
Asset value is vital for legal analysis. The next step in bankruptcy pre-planning addresses bankruptcy exemptions and perform a net-equity value analysis. Exemptions are laws that allow the debtor to keep equity in certain assets notwithstanding the fact that the items could be sold to raise some money to pay creditors. For example, the Colorado vehicle exemption is $5,000; if the debtor owns a vehicle worth $10,000, owes $6,800 on the vehicle, the net equity is $3,200. Since $3,200 is less than the Colorado vehicle exemption, the debtor can keep the car. If the debtor’s vehicle is worth $13,000, then the net equity is $6,200. Since $6,200 exceeds the Colorado vehicle exemption, the bankruptcy court would require the debtor to pay $1,200 ( $6,200 minus $5,000) into the bankruptcy to distribute to creditors. The lesson is do not overestimate the value of assets.
To value assets, the court looks at fair market value (“FMV”). FMV asks what would a person actually pay for the item in a normal market place for the type of item. For example, furniture is realistically worth what you could get at a garage sale or on Craigslist. A Current Market Analysis will usually suffice for real estate. Vehicles can be more tricky; you start with Kelly Blue Book, but if you need a lower valuation for pre-bankruptcy planning, there are other valuation models the trustees accept.
The starting point for effective pre-bankruptcy planning is accurate asset valuation.
Judge DENIES Debtor Default Judgment to Discharge Student Loan!
Every day thousands of default judgments are entered against people in financial distress, individuals who are unable to pay their bills for a variety of reasons. Yet, Judge Caddell, in the N. District of Alabama, in the case of Skipworth v. Citibank Student Loan Corp denied Troy Skipworth discharge of his student loans when Citibank failed to appear and contest the case. It is difficult enough (almost near impossible unless the facts align perfectly) to discharge student loans in bankruptcy, now, according to Judge Caddell, the creditor doesn’t even need to show up to win.
Let’s back up and provide some background to understand why this decision is harsh and unwarranted. The U.S. Justice system is adversarial in nature; in any court proceeding there are two sides, prosecution/defendant, plaintiff/defendant, debtor/trustee, etc. The judge is supposed to be an impartial arbiter of the dispute. In the civil context, a plaintiff sues defendant. If the defendant does not show up or otherwise contest the allegations of the plaintiff, then the plaintiff can request a default judgment. So long as the plaintiff has some shred of evidence to support their case, the court will grant a default judgment. Although the plaintiff has the burden of proof, the defendant has the burden to respond. If the defendant does not respond, the court will presume the allegations of the plaintiff are true and enter judgment accordingly. In hundreds of courts across the nation, thousands of default judgments are entered every day. Creditor X sues Debtor Y, debtor fails to respond; creditor gets a default judgment with no questions asked. Collection law firms are set up in every major city for the sole purpose of getting default judgments. And these default judgments are granted with the flimsiest of supporting evidence.
To discharge student loans in bankruptcy, a debtor must file an Adversary Proceeding in bankruptcy court. An Adversary Proceeding is the bankruptcy codes fancy phrase for lawsuit; a debtor must sue his student loan lenders to get the debt discharged. Mr. Skipworth sued Citibank Student Loan Corp., properly notified it; Citibank never responded, so Skipworth requested a default judgment.
However, the judge took it upon himself to fully inquire into the case, totally ignoring the adversarial nature of our justice system; and conducted a one-side trial.
