Some creditors are not entitled to postpetition interest on their claims.  For example, general unsecured creditors typically don’t get postpetition interest pursuant to 11 U.S.C. § 502(b)(2).

Other creditors are entitled to postpetition interest.

I.   Interest On Unsecured Priority Taxes

   A.  Chapter 11

For example, in Chapter 11 taxing authorities are entitled to postpetition interest on their unsecured priority claims.  See, e.g., § 1129(a)(9)(c), IRM 20.2.11.6.1.3(6)., and IRS pub. 908 at pages 26-27.

   B.  Chapter 13

However, the IRS is not entitled to postpetition interest on unsecured priority claims in Chapter 13, unless the debtor has sufficient disposable income to pay the interest.  11 U.S.C. § 1322(b)(1) and IRM 20.2.11.6.1.3(5). Continue Reading Payment of Postpetition Interest in Chapter 11 and Chapter 13 Plans

What is cash collateral?  Perhaps the best starting point to understanding the concept is with a relatively common example.  Suppose the debtor has a rental property encumbered by a mortgage.  The note undoubtedly has an assignment of rents provision.  This means that the creditor has a lien against the debtor’s stream of rent payments.  That stream of payments belongs to the creditor and is called cash collateral because it serves as partial collateral for the debt — the real property is the other portion of the collateral.  As long as the debtor makes the monthly payments, the creditor will take no action.  However, if the debtor stops making the payments and uses the cash collateral for personal or business purposes, the debtor violates the terms of the note.  This is a form of fraud.

Prior to filing the bankruptcy petition, the debtor has assets and debts.  When the debtor files the petition, the assets go into a bankruptcy estate, and the debts become claims against that estate.  In the case of an individual debtor, the debtor can remove assets from the estate using the appropriate exemption table.  The nonexempt assets remain in the estate.

One thing that the debtor cannot exempt is the cash collateral because that money is not one of the debtor’s prepetition assets.  It belongs to the creditor.

Suppose the debtor has been faithfully remitting payments to the creditor prepetition, while using the rest of the rental income for personal and business purposes.  After the debtor files the petition, can the debtor continue this practice?  The answer is no, unless the creditor agrees to it, or the Court grants the debtor permission to use the cash collateral.  11 U.S.C. § 363(c)(2).  See Fed, R. Bankr. P. 4001(b) and LBR 4001-2 for the mechanics.  You can either use Form F 2081-2.1, or prepare your own motion in standard pleading format.

Therefore, a standard first-day[1] motion is a motion to use cash collateral.  It is especially important to get the motion granted right away if the cash collateral is necessary to pay employees.  Otherwise, the employees will quit and the case will burst into flames.  Therefore, you should concurrently file an application for hearing on shortened notice to speed up the process.

Ideally, it’s best to get the cash collateral motion granted on a final, rather than an interim, basis.  Otherwise, you will have to prosecute future cash collateral motions.  However, if your judge will only grant the motion on an interim basis, then take what you can get.

Make sure you tell your client not to use any cash collateral until the judge enters the order authorizing its use.  Otherwise, the Court may either convert the case to one under Chapter 7, or appoint a trustee, or dismiss the case — whichever is in the best interests of the creditors.

Finally, before the judge enters the order, the debtor must segregate the cash collateral in a separate DIP account.  No comingling.  § 363(c)(4).  This isn’t much of an issue if the motion is granted within a couple of days after the petition date, but it is essential otherwise.

 

[1] In spite of the term, the motion does not have to be filed on the petition date.  However, it should be filed as soon as possible after the petition date.

This post assumes familiarity with my last three posts (Part 1, Part 2, and Part 3) this multi-part series.  Thus, while you can certainly read this post without reading those previous ones, you’ll get more out of it if you read those posts first.

Lien Valuation

We have already discussed motions to value liens.  What good are they?

First, if the goal is to strip off a wholly unsecured junior lien, it is important to establish that the junior lien really is wholly unsecured.  Therefore, getting a determination of the value of the senior lien(s) and an appraisal of the property is necessary to establishing the wholly unsecured status of the lien to be stripped.

Second, if the goal is to bifurcate the lien, one must have accurate values of the lien, any senior liens, and the property to get accurate values of the secured and unsecured portions.

Third, if the goal is to negotiate with the creditor, lien valuation fixes one of the starting points for those negotiations. Continue Reading Lien Avoidance in Individual Cases – Part 4: Lien Valuation

This post assumes familiarity with my last post (part 1) of this multi-part series.  Thus, while you can certainly read this post without reading that previous one, you’ll get more out of it if you read that post first.

III.  Avoidance Of A Partially Or Wholly Unsecured Lien In Chapters 11 And 13

11 U.S.C. § 506 is used to determine the extent to which a claim is secured.  Rather than delving into the wording of the statute, let’s informally say that if the value of the collateral is less than the sum of the liens against it, then at least some of the liens are not fully secured, and some may even be wholly unsecured.

For example, suppose the collateral is a piece of real estate worth $500,000.  And suppose there are three liens against it.  The first recorded has a balance of $475,000, the second recorded has a balance of $50,000, and the third recorded has a balance of $50,000.  Then the first is fully secured because the property is greater in value than the balance of the first.  The second is partially secured:  $25,000 is secured by the house, and $25,000 is unsecured.  And the third is wholly unsecured.

I realize that in today’s real estate market, this scenario is unlikely.  However, some years ago it was fairly common.  And given the cyclic nature of things, we may see a repeat of the past —plus ça change, plus c’est la même chose.

   A.  Avoiding A Wholly Unsecured Lien

In Zimmer v. PBS Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002) the Ninth Circuit held that a Chapter 13 debtor can avoid a wholly unsecured lien against the debtor’s principal residence. Continue Reading Lien Avoidance in Individual Cases – Part 2: Avoidance of a Partially or Wholly Unsecured Lien in Chapters 11 and 13; The Chapter 7 Context

This post assumes familiarity with my last two posts (Part 1 and Part 2) of this multi-part series.  Thus, while you can certainly read this post without reading those previous ones, you’ll get more out of it if you read those posts first.

V.  Some Other Issues Associated With Liens

A.  Is The Lien Perfected?

Suppose the debtor and all the debt’s assets are in Los Angeles County at the time the creditor records a lien in Orange County against the debtor’s principal residence in Los Angeles.  Is the creditor’s claim secured?  No.  The lien must be recorded in the county where the asset is.  Therefore, if the lien is recorded in the wrong county, the creditor’s is not a perfected security interest.  See, e.g., Cal. Civ. Code § 1169 (“Instruments entitled to be recorded must be recorded by the County Recorder of the county in which the real property affected thereby is situated.”).

B.  Is The Lien To Be Stripped Really A Junior Lien?

Sometimes a debtor will buy a house with what is called an 80/20 loan because the debtor can’t come up with the 20% down payment.  If the 20% loan is recorded first, then the junior is the 80% loan, which has a much bigger value.  Given the relatively small size of the 20% loan, the junior lien may not be wholly unsecured. Continue Reading Lien Avoidance in Individual Cases – Part 3: Other Issues Associated with Liens

This is the first of a four part series on lien avoidance.  I developed these notes for a presentation I gave to the Central District Consumer Bankruptcy Attorney’s Association, Los Angeles, California.

A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt.  A lien serves to guarantee an underlying obligation.  If the underlying obligation is not satisfied, the creditor may can seize the asset that is the subject of the lien.  In essence, a lien creates an in rem claim against the assets of a debtor against whom the creditor has an in personam claim.

There are many types of liens.  The most common liens against the assets of an individual debtor in bankruptcy are tax liens, liens arising from loans, mechanics liens, HOA liens, and judgment liens.  For those who may be new to dealing with liens in bankruptcy, here is some vocabulary: Continue Reading Lien Avoidance in Individual Cases – Part 1: Avoidance of Liens Under § 522(f)

IV. The Constitutional Problem With A § 706(b) Motion

I thank Daniel Press, an attorney practicing in Virginia, Washington, DC, and Maryland, for giving me his notes, which served as an afflatus for some of today’s post.

A. Historical Background

 1. The Chapter 13 Context

When Chapter 13 was enacted in 1978, it provided that only an individual could be a Chapter 13 debtor (11 U.S.C. § 109(e)), imposed limitations on the amount of debt a Chapter 13 debtor could have (11 U.S.C. § 109(e)), and — most important for today’s discussion — included postpetition earnings in the bankruptcy estate (11 U.S.C. § 1306(a)(2)) from which the debtor made Chapter 13 plan payments (11 U.S.C. § 1325(b)(1)(B)).

For a Chapter 13 Plan to succeed, the debtor must be a willing and active participant in the reorganization. Congress explicitly stated that an involuntary Chapter 13 would create a thirteenth amendment problem: Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 4

III. Dealing With A Motion To Convert Pursuant To Section 706(b)

This post assumes familiarity with my last two posts (Part 1 and Part 2) of this multi-part series. Thus, while you can certainly read this post without reading those previous ones, you’ll get more out of it if you read those posts first.

A. Oppose Any Motion To Extend The Time To Enter A Discharge

If the Court has already granted a nonconsumer debtor a Chapter 7 discharge, the judge will probably not entertain a motion to convert the Chapter 7 case to one under Chapter 11, pursuant to § 706(b). Therefore, oppose any motion to extend the time for the Court to enter the discharge. Here’s the argument: Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 3

In my last post I began to set the stage for a discussion of § 706(b) motions to convert a Chapter 7 bankruptcy case to one under Chapter 11 by considering § 707 motions to dismiss. I noted that § 707(b)(2) only applies to individual cases in which the debtor’s debts are primarily consumer debts.

In today’s post I’ll focus on the question of what kinds of debts are nonconsumer debts because in determining whether a Chapter 7 case should be dismissed, there can be a battle over which debts are nonconsumer and which are consumer. Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 2

There is an alarming trend facing us, and it is not the latest teen-age fashions. It is the filing of motions pursuant to 11 U.S.C. § 706(b), to convert individual nonconsumer Chapter 7 cases to Chapter 11.

Because the topic of § 706(b) motions is a bit complicated, and requires some background information to understand it, my discussion will span a multi-part series of posts. In this first post I’ll set the stage by beginning with the more commonly seen terrain of 11 U.S.C. § 707 motions to dismiss. Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 1