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3:15Pm Representing Creditors in Chapter 13 Chapter 5 2:05 – 3:15pm Representing Creditors in Chapter 13: Getting Relief from Stay, Objecting to Discharge, Bad Faith Filings Thomas S. Linde Schweet Rieke & Linde PLLC Electronic format only: 1. Creditor’s Presentation: Chapter 13 Electronic versions of these documents are available on the KCBA website: https://www.kcba.org/cle/EventDetails.aspx?Event=3713 CREDITOR’S REPRESENTATION: CHAPTER 13 THOMAS S. LINDE SCHWEET RIEKE & LINDE, PLLC 575 S. Michigan Street Seattle, Washington 98108 TELEPHONE: (206) 381-0125 FACSIMILE: (206) 381-0101 E-Mail Address: [email protected] COPYRIGHT: February, 2013 THOMAS S. LINDE is a member of Schweet Rieke & Linde, PLLC. He concentrates his practice in the areas of real estate law and creditors' rights and remedies, including real estate transactions and financing, judicial and non-judicial real property foreclosures, real estate contract forfeitures, evictions, and the representation of creditors in bankruptcy proceedings. Mr. Linde received his B.A. degree, magna cum laude, from the University of Washington and his J.D. degree, with honors, from the University of Washington School of Law. He is a frequent speaker at continuing legal education seminars relating to creditors' rights and remedies. Mr. Linde is a member of the King County, Washington State and American Bar Associations and the American Bankruptcy Institute. He is a past chair of the CLE Committee for the Washington State Bar Association, a past chair of the Bankruptcy Section for the King County Bar Association, a current executive board member of the Creditor-Debtor Section of the Washington State Bar Association, and a current co-chair of the Bankruptcy Section of the Federal Bar Association for the Western District of Washington. I. OVERVIEW OF BANKRUPTCY CHAPTERS There are three principal chapters for bankruptcy all of which can affect the interests of creditors: Chapter 7, Chapter 11, and Chapter 13. In addition, there is Chapter 12 which applies to family farms or fisherman. The provisions of Chapter 12 will not be discussed specifically in these materials though many of the same basic concepts discussed herein are applicable in a Chapter 12 proceeding. In all chapters, the filing of a bankruptcy petition creates a bankruptcy estate which is broadly defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). In a Chapter 13 case, the estate also includes all property the debtor acquires after commencement but before the case is closed, dismissed or converted. 11 U.S.C. § 1306(a)(1). If included in a bankruptcy estate, the disposition of the estate’s interests in property (wherever located) is subject to the jurisdiction of the bankruptcy court (which is not limited by state boundaries) and the requirements of the Bankruptcy Code. A. CHAPTER 7. A Chapter 7 is a liquidation proceeding wherein a trustee is appointed by the bankruptcy court to determine if there are sufficient non exempt assets available to administer and liquidate for the benefit of creditors. If non-exempt assets do exist, the trustee will administer and liquidate them and distribute the proceeds to creditors in accordance with the distribution and priority requirements of the Bankruptcy Code. 11 U.S.C. §726 and 11 U.S.C. § 507. B. CHAPTER 11. A Chapter 11 is a reorganization proceeding employed mostly by business debtors and allows the debtor to retain control of its assets subject to the requirements of the Bankruptcy Code while the debtor proposes a plan of reorganization to address and restructure its debts. The specific requirements and procedures for accomplishing a reorganization are governed by the provisions of Chapter 11 of the Bankruptcy Code found at 11 U.S.C. § 1101 et seq. C. CHAPTER 13. A Chapter 13 is a reorganization proceeding for “individual” debtors with regular income who are underneath certain debt limits and generally does not involve a business, unless it is a sole proprietorship. Like Chapter 11, Chapter 13 also allows the individual to retain control of his or her assets subject to the requirements of the Bankruptcy Code while the debtor proposes a plan of reorganization to address and restructure his or her debts. The specific requirements and procedures for accomplishing an individual reorganization are governed by the provisions of Chapter 13 found at 11 U.S.C. § 1301 et seq. 3 Under The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereinafter referred to as the “Act”), an individual debtor’s qualification for Chapter 7 will now be determined by applying a “means test” which will require that certain debtors whose income exceeds their state’s median income to file Chapter 13. The Act became effective in all cases filed after October 17, 2005. II. SALES OF PROPERTY INCLUDED IN A BANKRUPTCY ESTATE Under certain circumstances, the Bankruptcy Code gives the debtor and/or the trustee the ability to sell (after notice and hearing to all creditors and affected parties) real property of the estate “free and clear of any interest in such property”. 11 U.S.C. § 363(f). This is an extremely potent tool (to clear title) but can only be exercised if certain facts can be established. Moreover, if the sale is approved by the bankruptcy court, the adequate protection requirements of the Bankruptcy Code require that the liens, encumbrances and other interests which are removed from the property sold attach to the sale proceeds in the same order of priority. Under 11 U.S.C. § 363(f), property of a bankruptcy estate may be sold free and clear of liens of an entity other than the estate only if: (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. 11 U.S.C. Section 363(f). A sale free and clear of liens can be approved if applicable state law where the property is located would allow such a sale. 11 U.S.C. § 363(f)(1); In re Rose, 113 B.R. 534 (W.D. Mo. 1990) (interpreting Missouri law). In Washington, property can be sold free and clear of liens under state law in the context of a state court receivership proceeding. RCW 7.60.260. A sale can also be approved free and clear of liens if the holders of the liens consent. 11 U.S.C. § 363(f)(2). The failure to object to the bankruptcy court in response to receipt of notice of a motion to sell free and clear of liens can be implied as consent. In re Elliot, 94 B.R. 343 (Bankr. E.D. Pa. 1988). 4 Generally, sales free and clear of liens cannot be approved unless there are sufficient proceeds from the sale to payoff the liens in full and produce some equity for the benefit of the bankruptcy estate. 11 U.S.C. § 363(f)(3); See In re Riverside Investment Partnership, 674 F.2d 634, 640 (7th Cir. 1982); In re Stroud Wholesale, Inc.. 47 B.R. 99 (E.D.N.C. 1985). As the Seventh Circuit stated in In re Riverside Investment Partnership: As a general rule, the bankruptcy court should not order property sold "free and clear of" liens unless the court is satisfied that the sale proceeds will fully compensate secured lienholders and produce some equity for the benefit of the bankrupt's estate. See Freeman Furniture Factories, Inc. v. Bowlds, 136 F.2d 136, 140 (6th Cir. 1943); Hoehn v. McIntosh, 110 F.2d 199, 202 (6th Cir. 1940); In re Unikraft Homes of Virginia, Inc. 370 F.Supp. 667, 670-71 (W.D.Va. 1974); In re Bernhard Altmann International Corp., 226 F.Supp. 201, 205-06 S.D.N.Y. 1963); Cf. Standard Brass Corp. v. Farmers National Bank, 388 F.2d 86, 89 (7th Cir. 1967) (trustees abused discretion by selling property free of lien when sale returned no equity to bankrupt's estate). 674 F.2d at 640. There is a split of authority on this issue however, with some courts holding that the term “value of all liens” in 11 U.S.C. Section 363(f)(3) means the actual economic value of the lien and thus if it can be shown that an objecting creditor’s lien has no value, the property can be sold free and clear of the lien for a price which will not pay the lien in full. See, In re Beker Industries Corp., 63 B.R. 474 (Bankr. S.D.N.Y. 1986). For a good discussion of the split of authority on this issue see the decisions in In re WDH Howell, LLC, 298 B.R. 527 (D.N.J. 2003); In re Terrace Chalet Apartments, 159 B.R. 821 (N.D. Ill. 1993). Recently, however, the Ninth Circuit Bankruptcy Appellate Panel adopted the position articulated by the 7th Circuit in Riverside Investment Partnership by analyzing the language of 11 U.S.C. § 363(f)(3) and concluding: But another reason, rooted in the text of the paragraph, exists to reject such an expansive reading. Paragraph (3) permits the sale free and clear only when “the price at which such property is to be sold is greater than the aggregate value of all liens....” 11 U.S.C. § 363(f)(3) (emphasis added).
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