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Bankruptcy Procedure in the Context of Turnover and Preference Law

28 Sep 2016 00:00:00 -0800

By Cathy Ta

In the course of collections activities, a creditor can become singularly focused on aggressively pursuing enforcement of a debt by levying against the debtor’s property or by demanding and receiving payment from the debtor. However, if and when a debtor files for bankruptcy, the creditor may become the target of unwanted litigation when it levied against or received property that, through the mere occurrence of the debtor’s bankruptcy filing, is considered property of the bankruptcy estate. Thus, the creditor becomes part of the bankruptcy estate trustee’s litigation efforts to marshal property back into the bankruptcy estate under either turnover or preference law, depending on whether the creditor’s collections activities extinguished the debtor’s interest in property prior to the bankruptcy filing.

To put a bankruptcy estate trustee’s marshaling efforts against a creditor into context, it is helpful to understand that today’s bankruptcy law exists to provide a debtor a financial “fresh start” from burdensome debts. As stated by the Supreme Court in 1934, the law’s purpose has both a public and a private interest, in that “it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”¹

To provide this fresh start, modern bankruptcy law has been formulated as an exchange between a debtor and his creditors of assets for a discharge. This exchange is rooted in Congressional legislation passed in 1833, abolishing the English-originated legal practice of imprisonment for debt and paving the way for today’s decriminalization of bankruptcy.² Fundamental to effectuating this modern exchange are the several ways in which the current Bankruptcy Code provides for the maximization and marshaling of a debtor’s assets from the way in which property of the estate is broadly defined to turnover and preference law provisions. These recovery tools are designed to maximize payment to creditors on a ratable basis, so that when a discharge is ultimately granted to a debtor, the exchange is not only modern, but fair.³

Property of the Estate
Under the Bankruptcy Code, a major tool for maximizing a bankruptcy estate is how property of the estate is defined, which includes 1) all nonexempt “legal or equitable interests of the debtor in property,” as of the bankruptcy filing—otherwise known as the petition date,⁴ 2) all interests of the debtor and the debtor’s spouse in community property as of the petition date,⁵ and 3) certain property that the debtor acquires (or becomes entitled to acquire) within 180 days after the petition date.⁶

Property of the estate is also defined to take into account a trustee’s marshaling work against creditors by including property in which a debtor has no possessory interests as of the petition date but which the trustee recovers from creditors.⁷ Moreover, the term “property” has been generously construed to include “all kinds of property, including causes of action, disputed, contingent or reversionary interests, and all other forms of property.”⁸

Turnover and Preference Law
A bankruptcy estate trustee has two principal tools to recover property that was levied by or paid to a creditor prior to the petition date. They are turnover and preference law.

Under the Bankruptcy Code, turnover law is focused on bringing back property of the estate that is in the hands of a third party so that the bankruptcy estate trustee may monetize the property for the benefit of the bankruptcy estate and its creditors. Specifically, turnover law applies when a noncustodian⁹ entity¹⁰ is in possession, custody, or control of estate property at any time during the case, and the property is of a type that a trustee may use, sell, or lease, to the benefit of creditors.¹¹ Unless the property is of inconsequential value or benefit to the estate, the entity is required to deliver and turn over the property or its value to the trustee.¹²

In fact, this turnover power has been construed to allow a trustee to recover property or its value from a creditor who once had, but no longer has, possession, custody, or control of the property at the time a turnover motion is filed.¹³ Current possession, custody, or control is not required, but possession, custody, or control at any time during the case is sufficient.¹⁴ By allowing a trustee to seek recovery from any creditor so long as it had possession, custody, or control of estate property at some point during the case reinforces the principles underlying turnover law, which are to marshal assets back into the bankruptcy estate and to affirmatively require a creditor to turn over estate property that comes into the creditor’s possession.

Similarly, preference law is aimed at bringing back property of the estate into the hands of a third party, but unlike property subject to turnover law, this property had been transferred to the third party prior to the petition date. Additionally, preference law serves the additional purpose of guarding against a debtor who, while sliding into bankruptcy, favored one creditor over another by making a payment or other transfer to that creditor. Preference law avoids the preferential transfer so that the recovered property may be marshaled back into the bankruptcy estate to be redistributed ratably among its creditors.

Specifically, under the Bankruptcy Code, any transfer made by a debtor within 90 days of the petition date¹⁵ is statutorily defined as preferential if and when the transfer is made to or for the benefit of a creditor, for or on account of an antecedent debt, and the result of which enables the creditor to receive more than it would have received—in a Chapter 7 liquidation, had the transfer not been made— and in the bankruptcy case, as otherwise provided for under the Bankruptcy Code.¹⁶

There are some defenses, for example new value, ordinary course of business, and contemporaneous exchange.¹⁷ However, in essence, under preference law, a creditor is targeted for recovery on account of a certain payment or transfer statutorily defined as preferential so that assets may be marshaled back into the estate for a ratable distribution to creditors.

Whether a trustee uses turnover or preference law against a creditor will depend on whether there was a transfer in ownership or title of property. If there was an incomplete transfer, the debtor and the estate would retain some identifiable property interest that would be included in the broadly defined property of the estate, and turnover law would apply. If there was a complete transfer in ownership or title, the debtor and the estate would not maintain any identifiable property interest to be included in property of the estate. In this circumstance, the property must be recovered first through avoidance of the transfer before the property may be included in property of the estate.¹⁸

Whether there was a transfer in ownership or title of property prior to the petition date will depend on state law. While bankruptcy law provides for what a debtor’s interests in property is included in property of the estate, it is state law that determines the extent of a debtor’s interests, if any, in property itself.¹⁹

Illustrative Cases
In re Churchill Nut Co. is an unusual case that highlights how turnover and preference law are two sides of the same coin.²⁰ In this case, a walnut grower delivered 236 tons of walnuts to the debtor, a nut processor, for processing. After receiving minimal payment, the grower sued the debtor for damages and to foreclose on its producer’s lien. The grower obtained a judgment in its favor and thereafter obtained a writ of execution. The sheriff levied on the writ by seizing 166 tons of shelled nuts from the debtor, but before the actual sale of nuts, the debtor filed for bankruptcy. The bankruptcy court found that under California law when the sheriff seized the shelled nuts, possession was transferred to the benefit of the grower. However, this transfer did not extinguish the debtor’s interest in the shelled nuts because 1) they were still subject to other producers’ liens and 2) they were tangible property with uncertain value that had to be liquidated into money in order to effectuate a title transfer. As a result, the grower and the sheriff, as a custodian of the debtor’s property, were ordered to turn over the shelled nuts to the bankruptcy estate trustee.

Had the sheriff completed the sale prior to the debtor’s bankruptcy filing, so that the only duty left for the sheriff would be to turn over money to the grower,²¹ the sale would have extinguished the debtor’s interest prior to the bankruptcy filing and placed the money outside of turnover law. Nevertheless, the sale would be subject to avoidance under preference law as the sale would be a preferential transfer from the debtor to the grower.

In contrast to In re Churchill Nut Company, in which there was a money asset involved, In re Paul²² was a case in which the California State Board of Equalization levied the debtor’s bank accounts—a money asset— prior to the petition date. The bankruptcy court held that under California law, at the moment the notice of levy was served, ownership of the funds transferred to the Board. As a result, the bankruptcy court concluded that the funds were not property of the estate and therefore would only be recoverable as a preferential transfer.

Even when a money asset is involved, however, there may be a scenario in which a creditor’s levying activities will not terminate or overcome a debtor’s interest in the money asset because the debtor’s interest may be special or superior to any one creditor’s claim. In Hernandez²³, the sheriff levied funds on behalf of a judgment creditor but had yet to turn them over to the creditor when the bankruptcy was filed. The Bankruptcy Appellate Panel for the Ninth Circuit U.S. Court of Appeals found that the levied funds were exempt Social Security benefits; therefore, ownership had not transferred. “Because debtor had an exempt property interest in the [Social Security] funds, we conclude that [the creditor’s] levy did not operate to extinguish those interests.”²⁴

Another distinctive and nuanced scenario involving levying a money asset is a wage garnishment. In the Carlsen case,²⁵ the IRS levied wages that had been earned prepetition. Because in California a wage garnishment merely creates a lien and does not divest the debtor of all interest in the wages, the bankruptcy court held that the garnished wages constituted property of the estate. The court determined that the IRS had a duty to take positive action to halt the postpetition continuation of the garnishment, and it had to return the garnished wages.²⁶

To the extent a collection activity creates a lien, a lien may be subject to avoidance under preference law unless the lien is perfected prior to the 90-day preference period. In the Hilde case,²⁷ the Ninth Circuit U.S. Court of Appeals found that under California law a lien is created on all of the debtor’s nonexempt personal property from the date of an order to appear for a debtor’s examination once the debtor is served with the order, otherwise known as an ORAP lien. Likewise, an ORAP lien is created on the debtor’s personal property in the hands of a third party when the third party is served with a notice of the order.²⁸ If a turnover order is issued at the end of the debtor’s examination, another lien is created that relates back to the ORAP lien. Therefore, if a bankruptcy proceeding is filed more than 90 days after an ORAP lien is created, the ORAP lien is not avoidable under preference law and has priority over the claim of a bankruptcy trustee. In this case, the Ninth Circuit held that the ORAP lien was not avoidable because it was created more than 90 days prior to the petition date and therefore attached to all of the debtor’s nonexempt personal property in the bankruptcy.²⁹

Under California law, creditors are within their rights and powers to proceed against a debtor to enforce and collect on debts. However, creditors should be aware that should a debtor file for bankruptcy, all that a creditor may have completed, whether it be levying on property or receiving payment on the debt, may be subject to unwinding, and the creditor may be required to return property included in property of the estate. A bankruptcy estate trustee, or a debtor-in-possession in a Chapter 11 reorganization case,³⁰ under turnover or preference law, would be tasked in the fundamental work of marshaling property of the estate for the benefit of the bankruptcy estate and its creditors, as an essential part of modern bankruptcy law.

¹ Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (emphasis in original).
² Charles J. Tabb, The History of Bankruptcy Laws in the United States, 3 AM. BANKR. INST. L. REV. 5, 6, 16 (1995).
³ Ehring v. Western Cmty. Moneycenter (In re Ehring), 91 B.R. 897, 903 (B.A.P. 9th Cir. 1988).
⁴ 11 U.S.C. §541(a)(1).
⁵ 11 U.S.C. §541(a)(2) (all community property is includ - ed in property of the estate, except for community property that is under the sole management of the debtor’s spouse).
⁶ 11 U.S.C. §541(a)(5).
⁷ 11 U.S.C. §§541(a)(3), 542, 543, 547, 548, 550.
⁸ United States v. Sims (In re Feiler), 218 F. 3d 948 (citing S. REP. No. 989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R. REP. No. 595 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6323 (footnote omitted)).
⁹ The Bankruptcy Code provides a separate section for turnover of estate property by custodians. See 11 U.S.C. §543.
¹⁰ The term “entity” is defined as including person, estate, trust, governmental unit, and U.S. trustee. 11 U.S.C. §101(15).
¹¹ 11 U.S.C. §542(a).
¹² Id.
¹³ Shapiro v. Henson, 739 F. 3d 1198, 1200-01 (9th Cir. 2014).
¹⁴ Id.
¹⁵ This 90-day preference period is extended to one year as to insider-creditors. 11 U.S.C. §547(b)(4)(b). See also 11 U.S.C. §101(31) (“insider” is defined to include an individual debtor’s relatives, general partners, partnership, and corporation of which the debtor is a director, officer, or person in control, among others).
¹⁶ 11 U.S.C. §547(b).
¹⁷ 11 U.S.C. §547(c).
¹⁸ United States v. Whiting Pools, Inc., 462 U.S. 198, 209 (1983). See also In re Anaheim Elec. Motor, Inc., 137 B.R. 791, 794-96 (Bankr. C.D. Cal. 1992).
¹⁹ Paul v. State Bd. of Equalization (In re Paul), 85 B.R. 850, 853 (Bankr. E.D. Cal. 1988).
²⁰ Richardson v. Wells Fargo Bank (In re Churchill Nut Co.), 251 B.R. 143 (Bankr. C.D. Cal. 2000) (the bankruptcy court also conducted a preference analysis to conclude that the shelled nuts constituted recoverable property of the estate, but its main reasoning was that a transfer of ownership had not occurred prior to the bankruptcy).
²¹ See also Ramirez v. Fuselier (In re Ramirez), 183 B.R. 583 (B.A.P. 9th Cir. 1995) (The B.A.P. reversed the bankruptcy court, finding that the California levy statute did not specify that a completed levy—in this case, an installation of a keeper on the premises by the Marshal—transfers ownership in property; the property had to be liquidated; and the property of client files was necessary for the attorney- debtor’s representation of clients. The B.AP. held that the judgment debtor retained a possessory and reversionary interest in all the levied property, thus the property constituted propertyof the estate. The B.A.P. remanded the case to determine whether the Marshal’s violation of the automatic stay was willful and whether actual and punitive damages were appropriate.)
²² In re Paul, 85 B.R. 850.
²³ Collect Access LLC v. Hernandez (In re Hernandez), 483 B.R. 713 (B.A.P. 9th Cir. 2012).
²⁴ Id. at 724.
²⁵ Carlsen v. Internal Revenue Service (In re Carlsen), 63 B.R. 706 (Bankr. C.D. Cal 1986).
²⁶ But see In re Crosier, No. LAX 90-52768 VZ, 1991 Bankr. LEXIS 1102 (Bankr. C.D. Cal. July 5, 1991) (The IRS levied the debtor’s IRA prior to the bankruptcy filing. The bankruptcy court held that the IRA was intangible property and that the levy transferred title and ownership to the IRS, thus the IRA was not property of the estate).
²⁷ Southern Cal. Bank v. Zimmerman (In re Hilde), 120 F.3d 950 (9th Cir. 1997).
²⁸ See CIV. PROC. CODE §§708.110(d), 708.120(c).
²⁹ See, e.g., Dewhirst v. Citibank (In re Contractors Equipment Supply Co.), 861 F. 2d 241, 245 (9th Cir. 1988) (The debtor gave a creditor a security interest in its accounts receivable. The debtor then contracted with a company to provide equipment before filing bankruptcy. The debtor completed the order postpetition and the company paid the debtor direct instead of the creditor. The Ninth Circuit held that the accounts receivable were part of the estate because the assignment involved only a security interest, not a transfer title; therefore, the debtor retained an interest in the accounts receivable and was sufficient to bring the accounts receivable into the debtor’s reorganization estate.)
³⁰ 11 U.S.C. §1107(a) (a Chapter 11 debtor-in-possession shall have all the rights, powers, and duties of a trustee, except for the right to compensation).

This article originally appeared in the September 2016 edition of Los Angeles Lawyer magazine, a publication of the Los Angeles County Bar Association. Reprinted with permission.

Best in Law: Sometimes, Bankruptcy Can Help Maintain Vital Business Ties

04 Sep 2016 00:00:00 -0800

Generally, filing for bankruptcy is seen as a last resort for many businesses and individuals; understandably, the hardships of financial insolvency appear to even multiply at the mere thought of a bankruptcy filing.

However, what should be known about a bankruptcy filing is its usefulness as a tool to maintain, and even to rehabilitate, those business relationships that are vital to the business’ current and future operations, including those relationships that would end outside of bankruptcy.

Executory contracts

Only contracts that are executory, such as unexpired real property leases, may be assumed or rejected as part of the bankruptcy process, subject to bankruptcy court approval and certain limitations.

If a contract or lease has terminated prior to the bankruptcy filing date, known as the petition date, it would be non-executory and incapable of assumption or rejection.

The Bankruptcy Code does not define an executory contract; however, the U.S. Ninth Circuit Court of Appeals has adopted Harvard Law School Professor Vern Countryman’s definition: “a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.”

This means that if one party has substantially performed its side of the bargain, such that that party’s failure to perform further would not constitute a material breach excusing performance by the other party, the contract is not executory and cannot be assumed or rejected.

Whether a lease is unexpired and executory would be determined by this definition.

Assumption or Rejection

The ability to assume or reject an executory contract has significant implications in the context of a debtor who is a business operator, lessor or lessee – from offering the debtor a way to continue business relationships to relieving the debtor from future performance obligations that have become too burdensome or counterproductive with its long-term goals.

If assumed, the executory contract would resume in full force and effect, despite the bankruptcy filing and even when the debtor has defaulted under the contract as long as the default is cured (or adequate assurance of future cure is provided) and adequate assurance of future performance is provided.

Further, if assumed, the executory contract may be sold and assigned for value.

Typically, the rights of the non-debtor party would be limited to challenging the adequacy of any cure or assurance of future performance provided.

Thus, through the filing of a bankruptcy, a debtor would be afforded an opportunity it otherwise would not have to resume, or even rehabilitate, a business relationship that is in default through an election to assume that executory contract.

It also allows a debtor to maximize whatever value there may be left of the executory contract and devote it toward its long-term turnaround goals.

If an executory contract is rejected, the debtor would be able to walk away and be relieved from future performance obligations under the contract. This includes having to surrender the real property almost immediately if the contract is an unexpired lease.
Under the Bankruptcy Code, the rejection would be treated as if a breach of the contract had occurred immediately before the petition date, regardless of when the actual rejection is made.

The non-debtor party would have a claim for damages that would be administered as part of the bankruptcy process, including being subject to payment of pennies on the dollar and to the debtor’s discharge, should there be one.

A Way Forward

The usefulness of bankruptcy as a business tool to resume and rehabilitate business relationships all depends on timing – more often than not, a business or an individual’s exploration of its utility occurs too late rather than too early.

Therefore, instead of thinking of bankruptcy as a last resort, bankruptcy should be thought of as a potential resource in advancing a way forward, with those key business relationships and executory contracts intact.

This article first appeared in The Press-Enterprise on Sept. 4, 2016. Republished with permission.

To Assume or Reject: Unexpired Real Property Leases in Bankruptcy

13 Jun 2016 00:00:00 -0800

By Cathy Ta

When a debtor files for bankruptcy, certain contracts that are executory such as unexpired real property leases may be assumed or rejected as part of the bankruptcy process. This ability to assume or reject has significant implications in the context of a debtor who is a lessor or a lessee – from offering a debtor-lessor or lessee a way to continue business operations wherein the lease is an essential component to its operations to relieving a debtor-lessee from future performance obligations that have become too burdensome.

What is an Executory Contract?

The Bankruptcy Code provides that a contract may be assumed or rejected only if it is an executory contract or an unexpired lease, subject to bankruptcy court approval and certain limitations.¹ If a contract or lease has terminated prior to the bankruptcy filing date, otherwise known as the Petition Date, it would be non-executory and incapable of assumption or rejection.

While the Bankruptcy Code does not define what is an executory contract, the 9th Circuit has adopted Countryman’s² definition, which is a “contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.”³ This means that if one party has substantially performed its side of the bargain, such that that party’s failure to perform further would not constitute a material beach excusing performance by the other party, the contract is not executory and cannot be assumed or rejected. Whether a lease is unexpired and otherwise executory would be determined by this definition.

Significance of Assumption or Rejection

If a real property lease is unexpired and otherwise executory, a debtor in possession or a trustee charged with administering the bankruptcy estate could assume or reject it.

If assumed, the lease would resume in full force and effect, despite the bankruptcy filing and even when the debtor has defaulted under the lease as long as the default is cured or adequate assurance of future cure is provided. Further, if assumed, the lease may be sold and assigned for value, too. Typically, the rights of the non-debtor party to the lease are limited to challenging whether or not the assignee of the lease can provide adequate assurance of future performance or the adequacy of any cure. Thus, the power to assume and assign an unexpired lease allows a debtor in possession or trustee to maintain and maximize whatever value there may be left of the bargain under the lease.

Conversely, if the lease is rejected, the debtor in possession or trustee would be able to walk away and otherwise be relieved from future performance obligations under the lease. This includes having to surrender the real property almost immediately. Under the Bankruptcy Code, the rejection would be treated as if a breach of the lease had occurred immediately before the Petition Date, regardless of when the actual rejection is made. The non-debtor party would have a claim for damages which would be administered as part of the bankruptcy process, including being subject to payment of pennies on the dollar and to the debtor’s discharge should there be one.

Limits on the Decision to Reject or Assume

While a debtor in possession or trustee exercises the decision to assume or reject an unexpired lease, there are certain time limits after which automatic rejection occurs. Generally, in a chapter 7 case and with respect to a residential lease, a debtor or trustee has 60 days after the Petition Date to assume or reject it, after which, the lease is deemed rejected. In all other cases, the general time limit to assume or reject before automatic rejection occurs is at any time prior to confirmation of a plan of reorganization. Similarly, as a lessee under a nonresidential lease, a debtor in possession or trustee has until the earlier of 120 days after the Petition Date or the entry of an order confirming a plan to assume or reject the lease before it is deemed rejected.

Further, while a debtor in possession or trustee, as the lessor may reject an unexpired lease and walk away from the lease, that decision would not extinguish all the rights a lessee may have under the lease. That is because under the Bankruptcy Code, the lessee will have a choice between treating the lease as terminated as a result of the rejection, or if the term of the lease has commenced, retaining their rights under the lease, such as the rights of possession and quiet possession, until the end of the term, including any rights of renewal or extension.

Bankruptcy Goals

While the bankruptcy power to assume or reject unexpired real property leases is not unfettered, the power does serve the central goals of bankruptcy law, which is to provide a debtor a financial fresh start and to maximize the value of a bankruptcy estate for the benefit of creditors. Should that include continuing with an unexpired real property lease through assumption or disposing of the lease through rejection would be up to the debtor in possession or trustee.

11 U.S.C. § 365(a).
Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973).
Pac. Express, Inc. v. Teknekron Infoswitch Corp. (In re Pac. Express, Inc.), 780 F.2d 1482, 1488-89 (9th Cir. 1986).

This article originally appeared in the June 2016 edition of Riverside Lawyer magazine, a publication of the Riverside County Bar Association. Reprinted with permission.

BB&K Attorney Cathy Ta Appointed to IWIRC Southern California Board

11 Mar 2016 00:00:00 -0800

LOS ANGELES – Best Best & Krieger LLP is pleased to announce that attorney Cathy Ta has been named to the International Women’s Insolvency & Restructuring Confederation’s Southern California Network Board of Directors as the young professionals chair. In that position, Ta will have the opportunity to work with members in the areas of young professional development, leadership and mentorship.

IWIRC is committed to the connection, promotion and success of women in the insolvency and restructuring professions, including attorneys, forensic accountants and valuation experts. The Southern California Network covers the counties of Los Angeles, San Bernardino, Riverside, Orange and San Diego. Ta, a member of BB&K’s Bankruptcy and Business practice groups, will work to further the organization’s goal of involving and developing younger members by organizing educational and networking programming designed especially for them. This includes IWIRC’s annual fall program.

Ta, who splits her time between the firm’s Los Angeles and Riverside offices, is experienced in counseling and representing debtors, creditors, trustees and interested parties in potential or actual failures to perform, disputes, contested matters and adversary proceedings, in all aspects of insolvency, bankruptcy and litigation. Prior to joining the firm, she served as a law clerk for Bankruptcy Judge Marvin Isgur, in Houston, Tex. She is a graduate of Loyola Law School in Los Angeles, where she was a Dean’s Scholar.

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Best Best & Krieger LLP is a national law firm that focuses on environmental, business, education, municipal and telecommunications law for public agency and private clients. With nearly 200 attorneys, the law firm has nine offices nationwide, including Los Angeles, Sacramento, San Diego and Washington, D.C. For more information, visit www.bbklaw.com or follow @BBKlaw on Twitter.

BB&K Team Helps L.A. County Get State Funding for Exide Contamination

26 Feb 2016 00:00:00 -0800

Best Best & Krieger LLP is pleased to have assisted the Los Angeles County Board of Supervisors in securing $176.6 million to test and clean up contaminated areas near the now-closed Exide battery recycling facility in the City of Vernon. BB&K attorneys John Holloway and Gene Tanaka, as well as BB&K’s Director of Governmental Affairs Syrus Devers, accompanied supervisors and community members at an Assembly hearing on the clean-up efforts and discussions with legislators in Sacramento to help secure funding from Gov. Jerry Brown.

Brown originally proposed just $8.5 million for the effort, which involves testing for and removal of lead-contaminated soil from the most contaminated homes in an approximately 1.7-mile radius from the plant. This long-standing and high-profile contamination matter arises from the emissions of a former battery recycling facility, which operated for more than 30 years without proper permits and safety upgrades. High exposure to lead can cause a host of health concerns, and the State estimates that up to 10,000 homes may be impacted.

“This funding will bring immediate relief to thousands of families who have been voiceless for too long,” Supervisor Hilda Solis said in a thank you letter to those who assisted in the effort. This week, the Board of Supervisors acknowledged the lead partners’ work on the Exide clean up with a Commendation “in recognition of dedicated service to the affairs of the community and for the civic pride demonstrated by numerous contributions for the benefit of all the citizens of Los Angeles County.”

When One Spouse Files for Bankruptcy, But Not the Other

23 Feb 2016 00:00:00 -0800

When a Chapter 7, 11, or 13 case is filed, a new entity is created called the bankruptcy estate. A bankruptcy estate is comprised of all of the debtor’s non-exempt legal or equitable interests in property as of the time of the filing, wherever located and by whomever held, plus certain property that the debtor acquires (or becomes entitled to acquire) within 180 days after the case is filed. The idea is that “property of the estate” is broadly defined so as to maximize payment to creditors of the debtor; in exchange, at the end of the case, the “honest but unfortunate debtor” will receive a discharge that relieves the debtor from personal liability.

Notably, property of the estate also includes all interests of the debtor and the debtor’s spouse in community property¹ as of the time of the filing – even when the debtor’s spouse does not file for bankruptcy. Specifically, under bankruptcy law, the estate includes: (1) community property that is under the sole, equal or joint management and control of the debtor; (2) community property that is liable for a claim against the debtor; and (3) community property that is liable for a claim against the debtor and the debtor’s spouse. This means that property of the estate includes all community property except community property that is under the sole management of the debtor’s spouse. The purpose for including community property in the bankruptcy estate is so that creditors of the debtor as well as creditors with claims against community property (that may or may not be creditors of the debtor) may share ratably in the distribution of community property as they would have been able to under state law. In other words, a debtor who files bankruptcy without his or her spouse would not disadvantage creditors that hold claims against community property based on whether they are creditors of the debtor or the debtor’s spouse – these creditors will be paid alike. In exchange, the discharge will apply to bar these creditors from reaching the same type of community property that is acquired after the filing of the case. Therefore, a debtor’s bankruptcy filing not only discharges the debtor from personal liability, but also the non-filing spouse’s debts against community property that is property of the estate.

A community property debt is defined under state law. In California, a community property debt is any debt incurred by either spouse before or during marriage,² regardless of which spouse has the management and control of the property and regardless of whether each spouse is a party to the debt. In contrast, separate property of a person is liable for all of that person’s debts, whether incurred before or during marriage; the only debt for which separate property is not liable is a debt incurred by that person’s spouse before or during marriage. In a bankruptcy case, this means all of the filing spouse’s separate property as well as community property (except for those under the sole management of the spouse) is included in property of the bankruptcy estate for payment to creditors.

So, what happens when a debtor files a bankruptcy case without the spouse? In a Chapter 7 liquidation case, a Chapter 7 Trustee takes control of community property that passes to the bankruptcy estate, including whether or not to exercise the power to sell community property. In a Chapter 11 or 13 reorganization case, the debtor controls community property that passes to the bankruptcy estate. This means that the non-filing spouse loses control over community property, whether or not the non-filing spouse authorized (or even knew in advance of) the debtor’s filing, given that spousal authorization is not a filing requirement under bankruptcy law. At minimum, a non-filing spouse participates in the bankruptcy case by being entitled to notice and hearing before any disposition of community property. The non-filing spouse also could participate by joining the bankruptcy case as appropriate or in the case of a bad faith filing, defeating the bankruptcy case through a motion to dismiss.

Once a bankruptcy case is filed, the bankruptcy court exercises exclusive jurisdiction over property of the estate so as to orderly administer assets and liabilities of the bankruptcy estate. Typically, a bankruptcy court will not overturn a property division agreement approved by a state court, but, it may do so if the division was not at arms-length and fraudulent as to creditors. The practical effect is that the spouse that first files bankruptcy will determine not only the fate of community property, but also who and which court will exercise control over it during the bankruptcy case.

In short, bankruptcy law is crafted to include com-munity property as part of the bankruptcy estate so that in general, all community debt may be paid from community property (before separate property is used to do so). This is the case even when only one spouse files for bankruptcy.

1. In California, community property is any property acquired by a spouse during the marriage (that is not a gift or inheritance) while domiciled in the state.
2. “During marriage” is the period that does not include when the spouses are living separate and apart before a divorce or legal separation. In California, spouses may hold property as joint tenants, tenants in common, community property, or community property with a right of survivorship; regardless, the property would be treated as community property.

This article originally appeared in the February 2016 edition of Riverside Lawyer magazine, a publication of the Riverside County Bar Association. Reprinted with permission.

BB&K Partner Franklin Adams Discusses the City of San Bernardino Bankruptcy Plan with the Press-Enterprise

26 Jan 2016 00:00:00 -0800

In an interview by a Riverside Press-Enterprise reporter regarding the City of San Bernardino’s proposed bankruptcy-exit plan, Best Best & Krieger LLP Partner Franklin Adams said other California cities have used similar plans with approval from courts.

“A judge will look at what’s in the best interests of the city and creditors and what’s fair and equitable,” Adams told the newspaper, speaking generally about bankruptcy cases and not specifically about San Bernardino’s. “You have a city that needs fire and police and the trash picked up, and the ability of the city to meet those needs is one of the things that she will consider.”

He added: “I think the essential thing is the ability for a city to move forward in a reasonable way and still provide services to the citizens.”

To see the full article, which appeared in the Jan. 24, 2016 edition of the Press-Enterprise, click here.

Calif. Real-World Training Rules May Spark National Trend

09 Jan 2015 00:00:00 -0800

By Gavin Broady

As young lawyers continue to face a punishing job market, California is poised to implement a bold set of competency requirements tying bar admission to significant real-world training and pro bono work, a move that many states are likely to follow but that some experts worry will do more harm than good.

The first-of-its-kind initiative, spearheaded by the state bar's task force on admissions regulation reform, is designed to close a perceived gap between law school education and the obligations of real-world practice by requiring either 15 units of law school course work focused on practical skills training or equivalent post-graduate work in externships, clerkships or apprenticeships.

New attorneys seeking admission to the 242,000-member California bar would also be required to log 50 hours of legal work for pro bono or modest means clients, as well as 10 hours of mandatory, post-admission training focused on lawyer competency skills.

…

The admissions requirements may also have benefits for young attorneys beyond increased marketability in a tough job climate, according to Best Best & Krieger partner Richard Egger, who sees big-picture value in requiring new lawyers to take on pro bono projects.

“At the end of the day, it’s a way for people to gain some more basic skills, but at the same time they’re gaining an understanding that law as a profession does have some component of service to the community,” Egger said. “Having that requirement early might help instill a sense of civic responsibility in young lawyers, and that’s not a bad thing.”

To read the full article in Law360, which ran Jan. 9, 2015, click here (subscription required).

Asset Protection: Facts and Fantasies

01 Oct 2014 00:00:00 -0800

BB&K Partner Franklin Adams was the guest speaker at the Estate Planning Council of Riverside County’s monthly meeting in October. He discussed “Asset Protection: Facts and Fantasies.”

For more information, please visit the Estate Planning Council of Riverside County by clicking here.

Municipalities in Distress at IMLA 2012 Annual Conference

21 Oct 2012 00:00:00 -0800

BB&K attorney Frank Adams was a panelist at the 2012 IMLA Annual Conference on "Municipalities in Distress." The presentation was an overview of Chapter 9 and status of current events in pending Chapter 9 bankruptcies.

BB&K Speaker:
Frank Adams

When and Where:
October 21, 2012
Austin, TX

Related Article:
Strategies to Avoid Municipal Bankruptcy in California, PublicCEO.com, October 2012

Download presentation material here:
Municipalities in Distress

For more information about the event, please visit the IMLA website.