Chapter 3 11:15 11:45am Chapter 13 for Small Business Gloria Z. Nagler Nagler & Malaier, P.S. PowerPoint distributed at the program and also available for download in electronic format: 1. Chapter 13 for Small Business 2. Median Income Electronic versions of these documents are available on the KCBA website: https://www.kcba.org/cle/eventdetails.aspx?event=3713
CHAPTER 13 FOR SMALL BUSINESS IN DISTRESS March 7, 2013 Gloria Z. Nagler Nagler & Malaier, P.S. 500 Union Street, Ste. 927 Seattle, WA 98101 206-224-3462 www.naglerlaw.com TIME BETWEEN FILING BANKRUPTCIES 1328: Must wait 4 years from previous discharge in Chapter 7, 11, 12 to file Chapter 13 OR Must wait 2 years from previous Chapter 13 However, if debtor not seeking, g discharge but only automatic stay (e.g., facing foreclosure) can file Chapter 13 anytime. 1
CREDIT COUNSELING AND DEBTOR EDUCATION If individual is filing with sole proprietorship, must do the prefiling credit counselling and financial education post-filing MEANS TESTING In Washington: 1 Person: $53,302.00 2 People: $63,873.00 3 People: $71,379.00 4 People: $82,942.00 Add $7,500.00 for each additional person beyond 4 If debtor is under median income, can do 36-month Plan. If debtor is at or over median income, must do 60- month Plan. 2
Debt Limits Under 109(e) debtor filing Chapter 13 must have less than $360,475 in noncontingent, liquidated, unsecured debt and less than $1,081,400 in noncontingent, liquidated secured debt. Guaranteed debt, not in default at time of filing, may be contingent and thus not count toward limit. 3
In re Croney, 2011 WL 1656371 (Bkrtcy, W.D. Wash. 2011 J. Overstreet): Absolute, unconditional personal guaranty is noncontingent and therefore counts toward the debt limits. Tort claim, unliquidated, in many cases will not count toward the debt limit. Debt limits increase Debt limits increase periodically (generally, every three years) 4
Why File Chapter 13 for Business? Much less expensive than a Chapter 11 because less court work and because U.S. Trustee not as involved. Plan process in Chapter 13 is simple and often requires no hearing. Chapter 11 Plan process requires at least two hearings (possibly evidentiary) and significantly more attorney time to draft. 5
Chapter 13 Plan does not need vote of creditors r to be confirmed. Use of Cash Collateral 363(c)(2) prohibits debtor from spending cash collateral without consent of secured creditors OR court order allowing use. What is cash collateral? 363(a) defines it to include 363(a) defines it to include, among other things, rents, profits, and receivables. 6
Courts can sanction debtors who use cash collateral without permission of secured creditor or court approval of such use. 363(c)(2) Sanctions could include personal liability under tort of conversion. Conversion is basis for non-dischargeability. Could also result in denial of use of cash collateral and thus, often, in end of the business. 7
Best practice is to negotiate use of cash collateral with creditor(s) before filing the bankruptcy. An agreement will help assure timely payment of wages and other regular business expenses, and save the fees incurred in a contested hearing. Consent by secured creditor must be expressed and not implied. In re Freightliner Market Dev. v. Silver Wheel Freight, 823 F.2d 362 (1987). 8
Secured creditor may want replacement lien on post-petition receivables, additional collateral, monthly budget, regular accounting reports, lock-box for proceeds, etc. If no agreement can be reached, then debtor files motion for use of cash collateral. Often, evidentiary hearing will be necessary. Plan Confirmation Plan must meet best interest of creditors r test : t Must pay as much as creditors would receive in Chapter 7 (liquidation analysis) 9
Priority Claims must be paid in full over life of plan. Priorities defined in section 507 of the Code: Support payments Certain taxes (e.g., 941, sales tax, last 3 years income tax) Wages within 180 days of filing up to $11,725 10
Consumer deposits up to $2,600 Plan can be 36 to 60 months long. If debtor s income over median, Plan must be 60 months. Monthly payment is highest of three calculations: 1. Enough to pay all priority claims over life of Plan. 11
2. Disposable income OR 3. Liquidation analysis (value of non-exempt assets). Secured Debt Can bifurcate claims on other than residence Can modify interest rate Valuation is critical issue 12
Tax Returns 1325(a)(9) requires that all tax returns must be filed before Chapter 13 Plan can be confirmed CHAPTER 7 FOR BUSINESSES Good only for liquidation Usually not worth the cost of doing a Chapter 7 because no discharge, no exemptions And Trustee will examine books 13
WHY FILE FOR CORPORATIONS AT ALL: Recover preferences, fraudulent transfers Preserve assets for fair, orderly distribution Under RCW 51.48.055(4) allows company s principals to avoid personal liability for L & I debt if company files Chapter 7 before personal assessment. IN MOST CASES, NO REASON TO FILE CHAPTER 7 DISSOLVE UNDER STATE LAW 14
LIQUIDATE ASSETS, IF ANY LETTER TO CREDITORS Sometimes principals of business want to file Chapter 7 to avoid having to deal any longer with the business creditors Or to reassure creditors that there has been no fraud Corporations, LLCs Under 109(e), only Under 09(e), only individuals, not corporations, partnerships, or LLCs, can file Chapter 13 15
Thus, sole proprietorships can be protected under Chapter 13 because the business is not a separate legal entity and comes into the Chapter 13 estate. Debtor can convert LLC or corporation rat to sole proprietorship before filing Chapter 13 Liens on corporate property would follow assets into sole proprietorship. e.g., tax liens, UCC liens. 16
All corporate creditors would be listed as creditors of the Chapter 13. Must be no intent to defraud corporate creditors. Conversion to sole proprietorship could be challenged by creditors or Trustee. 17
Preference in Business Case In a business bankruptcy the debtor or trustee cannot avoid a preference payment less than $5,850.00. 547(c)(9) Where debts are not primarily consumer. Treatment of Leases Debtors have only 120 days (unless Court order extends to 210 days) to assume or reject non-residential real property leases unless lessor agrees to longer period. 365(d)(4) Shorter period will most seriously affect debtors that t operate retail chains. 18
Nonresidential real property lease must be assumed (or deadline extended) within 120 days or prior to confirmation order, whichever comes first, even if confirmation order is entered prior to 120-day period. If not assumed, then lease is deemed rejected and debtor must immediately surrender premises. 365(d)(4). So move to extend deadline if debtor not ready to assume or reject. Motion must be filed before deadline expires. 19
Debtor can not assume expired lease. Debtor must be current, or promptly cure, in order to assume lease. 365(b)(1)(A) Section 365(f)(2): Debtor can assign lease, once assumed, notwithstanding lease provisions to the contrary. 20
Debtor needs to prove adequate assurance of future performance by assignee of lease (whether or not default exists). Section 365(f)(2)(B) 502(b)(6): Lessor s claim for terminated lease: lessor s claim is limited to greater of one year, or 15%, not to exceed three years, Following earlier of date of filing of the petition and date on which lessor regained possession Plus 21
Any unpaid rent under lease, without acceleration, on the earlier of such dates. 503(b)(7): if lease assumed and later rejected, claim is equal to all money due (except penalties) for two years following later of rejection date OR date of actual turnover of premises. 22
Balance of monies due shall be claim under 502(b)(6). CURE OF NONMONETARY DEFAULTS IN LEASE Real Property Leases: 365(b): Need not cure nonmonetary defaults if impossible to do so e.g., cannot cure violation of going g g dark clause 23
Personal Property Leases and Contracts: Only exception to the cure requirement for assumption is the satisfaction of penalty rates or penalty provisions. So must cure nonmonetary defaults. 365(p)(3) mandates that personal property p rty leases be assumed by the time of Plan confirmation or lease is deemed rejected and relief from stay granted. Assumption must be done by motion, on, not just Plan provision. 24
366 UTILITIES The 2005 amendments gave lots of power to utilities. Utilities can terminate service after 30 days without court approval if adequate assurance from debtor not satisfactory. Debtors who cannot reach agreement will need to preempt unilateral termination by seeking relief from court within 30 days of the bankruptcy filing. Chapter 13 Trustee (Michael Fitzgerald) is disbursing agent for Plan payments in Seattle and northern counties 25
Trustee receives fluctuating percentage (5% to 7%, generally) of payments as compensation Debtor remains in possession of all property of estate Discharge in Chapter 13 Discharge for debtor Discharge for debtor comes at completion of Chapter 13 Plan 26
Census Bureau Median Family Income by Family Size (Cases filed on and after November 1, 2012) Family Size State 1 earner 2 People 3 People 4 People * Alabama $39,307 $48,166 $51,156 $63,388 Alaska $52,713 $70,172 $80,531 $86,581 Arizona $41,253 $54,000 $54,526 $59,786 Arkansas $35,765 $45,394 $48,491 $55,444 California $47,433 $61,752 $66,034 $74,122 Colorado $48,544 $64,300 $70,794 $85,027 Connecticut $57,154 $71,400 $84,638 $100,451 Delaware $47,305 $61,436 $71,798 $83,424 District of Columbia $49,168 $80,298 $80,298 $80,298 Florida $41,065 $50,711 $53,820 $63,937 Georgia $40,378 $50,901 $55,050 $65,851 Hawaii $48,907 $62,601 $74,460 $82,973 Idaho $40,938 $48,884 $49,482 $61,058 Illinois $46,522 $58,647 $67,328 $79,138 Indiana $41,236 $51,551 $57,721 $69,328 Iowa $41,351 $57,659 $63,243 $76,777 Kansas $41,714 $55,698 $64,571 $74,853 Kentucky $39,209 $45,866 $54,485 $66,409 Louisiana $37,197 $46,763 $54,730 $68,921 Maine $40,647 $52,148 $59,200 $78,310 Maryland $57,088 $72,191 $85,438 $106,707 Massachusetts $54,475 $66,076 $80,822 $101,523 Michigan $44,116 $51,554 $60,464 $72,366 Minnesota $47,122 $62,363 $75,350 $87,319 Mississippi $35,505 $42,221 $45,128 $58,047 Missouri $40,259 $50,734 $58,342 $70,687 Montana $41,443 $53,260 $55,822 $65,695 Nebraska $41,012 $58,336 $65,872 $75,495 Nevada $44,013 $54,545 $54,545 $65,212 New Hampshire $51,522 $64,495 $81,243 $97,441 New Jersey $59,906 $68,284 $83,292 $101,682 New Mexico $37,571 $50,911 $50,911 $60,368 New York $46,821 $58,106 $67,652 $81,522 North Carolina $39,885 $50,762 $55,197 $63,665 North Dakota $40,714 $60,245 $67,295 $84,896 Ohio $41,946 $52,139 $59,724 $72,764 Oklahoma $39,841 $50,529 $52,415 $63,069 Oregon $42,285 $53,941 $60,941 $65,950 Pennsylvania $46,477 $54,091 $67,452 $80,414 Rhode Island $45,945 $60,358 $75,306 $82,086 South Carolina $38,442 $49,523 $52,447 $60,143 South Dakota $37,299 $56,029 $64,494 $72,460 Tennessee $39,082 $47,631 $53,963 $63,719 Texas $40,389 $54,762 $59,276 $65,932 Utah $49,942 $54,952 $62,144 $65,240 Vermont $45,086 $60,451 $66,400 $84,011 Virginia $52,247 $64,593 $76,012 $89,803 Washington $51,655 $63,803 $69,844 $81,582 West Virginia $40,658 $43,633 $53,679 $65,403 Wisconsin $42,776 $57,479 $64,441 $79,648 Wyoming $44,417 $61,912 $72,194 $77,137 Family Size Commonwealth or U.S. Territory 1 earner 2 People 3 People 4 People * Guam $37,631 $44,994 $51,273 $62,047 Northern Mariana Islands $25,270 $25,270 $29,400 $43,242 Puerto Rico $21,938 $21,938 $23,060 $27,609 Virgin Islands $29,857 $35,884 $38,260 $41,918 * Add $7,500 for each individual in excess of 4. Accessed: http://www.justice.gov/ust/eo/bapcpa/20121101/meanstesting.htm