In voluntary petitions are filed by creditors to protect assets where it is believed a debtor is dissipating assets. The involuntary petition allows the bankruptcy trustee to recover “avoidable transfers” which occurred within 90 days prior to the filing and prevent or undue transfers to insiders and fraudulent conveyances. Once an involuntary petition is filed, the bankruptcy court holds a hearing on the requested relief. The court considers numerous factors including the number of creditors, totals debt and whether the debtor has been paying the debts as they come due. As a general rule, just like a voluntary petition, the court is looking for fraudulent and unreasonable activities. If it appears a debtor is trying to hid assets or is conducting business in a way that is detrimentally to one creditor to the benefit of another, odds are the involuntary petition will be approved. Conversely, a debtor has the opportunity to rebut the claims of creditors by demonstrating that debts are being paid as they come due and that there have been no fraudulent activities. If successful, the debtor can request the court enter a judgment against the creditors for attorney fees and costs. 11 USC 303(i)(1). In extreme cases, the bankruptcy court can assess punitive damages. 11 USC 303(i)(2).

Although involuntary bankruptcies are rare compared to voluntary filings, it is important to be aware that the opportunity exists for creditors. If faced with an involuntary bankruptcy, you should consult a knowledgeable bankruptcy attorney.

- Richard V. Stokan, Jr.

Bankruptcy appellate procedure is often not well understood, in part because the procedure is not the same throughout the United States (some may find this surprising since we only have one Bankruptcy Code throughout the United States).  Some parts of the country use a Bankruptcy Appellate Panel (abbreviated BAP), which is a group of judges from the United States bankruptcy courts who are appointed to hear appeals from certain bankruptcy cases,  under the supervision of the U.S. Courts of Appeals.  Not all of the federal judicial circuits have Bankruptcy Appellate Panels. As of 2008, the only judicial circuits which have convened these panels are the First, Sixth (which includes Michigan, where our firm practices), Eighth, Ninth, and Tenth Circuits. Those circuits which chose not to establish panels would have bankruptcy appeals heard by the United States district courts.

Even within our state, Michigan, bankruptcy appellate practice is not uniform.  In appeals arising out of the Western District of Michigan, parties have the option of having their appeal determined either by the Sixth Circuit BAP or the district court. The Eastern District, on the other hand, does not utilize the BAP.  When a party intends to file an appeal from a bankruptcy court order in a circuit that has created a BAP (like the Sixth Circuit) and from a district that has authorized the BAP to hear appeals (like the Western District of Michigan), that party faces a choice. Either the party can pursue its appeal before the BAP, or they may elect at the time of filing to have the appeal heard by the district court.  The appellee (the person opposing the appeal) also faces a choice:  assuming that the appellant (the party who filed the appeal) does not chose to have an appeal decided by the district court, the appellee (or any other party) may elect to have the appeal heard by the district court within 30 days after service of the notice of appeal.  Parties in the Eastern District, where we practice, do not have such a choice; if a party wishes to appeal a bankruptcy court’s decision in our jurisdiction, they must take their case to the district court.

Most bankruptcies do not involve appeals.  However, your bankruptcy attorney should have at least a basic familiarity with how bankruptcy appeals work, just in case a difficult issue arises in your proceeding.

-Drew Broaddus

The opinion has drawn heavy fire from the consumer bankruptcy bar as many fear it will significantly restrict the range of topics practicioners can discuss with clients. As Justice Roberts pointed out at oral argument, under certain circumstances, incurring debt in contemplation of bankruptcy might be perfectly appropriate. Indeed, through the earmarking doctrine, Courts have long recognized an expection to the trustee’s avoidance powers as they relate to pre-bankruptcy payments to creditors. Problem: alerting consumer clients to the existence of the earmarking doctrine is akin to recommending that they incur new debt.

In order for pre-bankruptcy payments to creditors to trigger the avoidance powers of the trustee, preference laws require property be transferred in satisfaction of an antecedent or past debt. The preference laws do not apply if property is transferred in exchange for a new debt. Under the earmarking doctrine, newly borrowed money simply passing through the debtor’s hands and designated solely to satisfy an existing debt is not an avoidable preference. In order for the rule to appply, the debtor must have no control over the property; it must be “earmarked” for payment to the existing creditor on account of the existing debt. By incurring new debt earmarked specifically for an existing creditor, the debtor does not diminish the bankruptcy estate and the preference laws are not triggered. Property of the debtor is not going to pay down debt, instead funds from a non-debtor source indepenedent of the estate are merely passing through the debtors hands. This is certainly an academic distinction but a substantive one nonetheless.

What remains to be seen is whether the prohibitions contained in Milavetz prevent advising clients of this loop hole in the preference laws.  After all, for the earmarking doctrine to apply, new debt must be incurred. Further, in the case of the consumer seeking to sheild a family member from an adversary case, it can be argued that the new debt will usually be principally motivated by the impending bankruptcy filing as it is the creation of the estate that triggers the trustee’s avoidance powers. Proper use of the earmarking doctrine should be an example of an appropriate circumstance in which a bankruptcy attorney can properly advise a client to incur new debt before filing bankruptcy. However, in light of the sweeping prohibitions contained in Milavetz, is the bankruptcy bar now prohibited from providing clients valuable information regarding the pitfalls inherent in pre-bankruptcy transfers and the trustee’s avoidance powers? Is incurring new debt pursuant to the earmarking doctrine principally motivated by the prospect of bankruptcy?

Certainly nothing in the Milavetz decision changes the analysis under the Bankruptcy Code. The earmarking doctrine will continue to exist in theory, only time will tell whether bankruptcy attorneys will be permitted to discuss its implications with their clients.

Each federal district has one or more bankruptcy courts, each of which is responsible for debtors within a certain geographic region.  Debtors can file a petition in a district they have been domiciled or had a residence, principal place of business, or principal assets for 180 days. Debtors may also file in a district where an “affiliate,” general partner, or partnership has a pending case.  This is not to suggest that the question of where to file will be easy to answer; venue can be a complicated issue in some bankruptcy cases.  If you’ve moved in the last three months, have assets in multiple cities, or run a business, you should contact a bankruptcy attorney to discuss the appropriate venue in your particular case.

In most cases, however, you will file in the district you live in; visit http://www.uscourts.gov/links.html and enter either your city or zip code.  This will direct you to the web site for your local Bankruptcy Court.  For Michigan in particular, the Western District of Michigan’s homepage also provides a map which shows which portion of the state falls within its jurisdiction.

-Drew Broaddus

In May 2009, the Supreme Court U.S. handed down Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), a decision which makes it harder for numerous civil plaintiffs to escape dismissal of claims brought in federal court. Although the facts in Iqbal concern a civil rights claim, the decision also has relevance in the context of bankruptcy adversary proceedings. This is because Iqbal expressly applies to the pleading of each element, including knowledge and intent, of every claim in federal court.

Iqbal arose out of the arrest and detention of Javaid Iqbal, a Muslim Pakistani. Mr. Iqbal filed suit in New York federal district court alleging that federal officials, including former Attorney General John Ashcroft and FBI Director Robert Mueller, adopted certain policies that unconstitutionally discriminated against him while he was in a special maximum security housing unit. Ashcroft and Mueller moved to dismiss for failure to state a claim. In particular, they argued that Mr. Iqbal ’ s complaint did not sufficiently allege that they had a discriminatory purpose in adopting the policies at issue. The district court denied their motion. While appeal to the Second Circuit Court of Appeals was pending, the Supreme Court decided Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), which held that, at least in the context of an antitrust suit, a complaint must allege “ enough facts to state a claim to relief that is plausible on its face. ” The Second Circuit held that Twombly did not apply to Iqbal ’ s discrimination claims and affirmed the lower court ’ s decision. The Supreme Court reversed. In reaching this result, Justice Kennedy’ s majority opinion contains four significant holdings: (1) The heightened pleading standards of Twombly apply in all federal civil actions, (2) The heightened pleading standards of  Iqbal/Twombly apply to allegations of all elements of a claim, even when the plaintiff has not alleged fraud; (3) the Iqbal/Twombly standard specifically requires plaintiffs to “ plead factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”; and (4) plaintiffs cannot evade Iqbal/Twombly’s heightened pleading standards through promises that discovery will be limited.

Iqbal is a significant development for civil defendants seeking to dismiss complaints filed in federal court no matter what the type of claim – including, for example, consumer debtors who are facing adversary actions by Trustees or creditors. Iqbal clarifies that Twombly applies to all elements in all federal civil suits, and some attorneys say it adds a distinctly pro-defendant gloss on the Twombly standard.

The Michigan State Bar Business Law Section’s May 18, 2010 meeting in Southfield will explore the implications of this holding for bankruptcy adversary proceedings, particularly avoidance actions by Trustees.

-Drew Broaddus

Involuntary bankruptcy is not available to creditors in all circumstances.  The debtor must owe a relatively high amount to a relatively small number of creditors.  To initiate these proceedings, a single creditor must hold an unsecured claim of at least $10,000.00 against the debtor, and the debtor must have fewer than twelve unsecured creditors. Otherwise, the creditor will have to join with other creditors to file the lawsuit. In that case, there must be at least three creditors with unsecured claims totaling at least $10,000.00 against the debtor. For this reason, the average individual who gets behind on their credit card does not have to worry about being forced into bankruptcy.  However, individuals who are in business for themselves or have personally guaranteed business debts can sometimes face this problem.

Forcing a debtor into involuntary bankruptcy is usually not a creditor’s first choice.  Creditors may chose this rather aggressive option because it forces a debtor to confront all his creditors at once, instead of forking over money only to those who press the hardest. Additionally, involuntary proceedings keep a debtor from draining all his assets before finally giving up and filing for bankruptcy.  Creditors do not take this measure lightly however; Section 303(i) provides that if a petition for involuntary bankruptcy is denied, the court may award the debtor costs and attorneys fees. Section 303(i) also allows the debtor to recover damages where an involuntary petition has been filed by his or her creditors in bad faith.

If you are facing involuntary bankruptcy, contact an experienced bankruptcy attorney as quickly as possible.

-Drew Broaddus

Morality is of paramount  concern to many faced with the decision of whether to file for bankruptcy. Most who incur debt intend to pay it back, hence waving the “financial white flag” and meeting with a bankruptcy attorney can be difficult, it just doesn’t “feel right.” Is filing for bankruptcy immoral? Odd as it may seem, I believe Francis Ford Coppola’s classic The Godfather is instructive on the subject. I can hear the reaction of my reading audience……”John, what can a crime novel/movie teach us about morals? Give me a break.” Before you dismiss the argument out of hand, consider the priorities of Don Corleone and his ultimate successor and beloved son Michael Corleone. The Corleones espoused family above all else. Armed with the conviction (no pun intended) that higher authority was corrupt, Don Corleone did whatever it took to provide for his family. Of course this article is not intended to condone murder for hire, prostitution or the use of an olive oil business as a front to launder money. It is to say that when deciding if bankruptcy is the right option, consider what is best for your family.

For most Americans, family comes first, the Corleones being no exception. Losing a monthly struggle to cover the mortgage or credit card bills while worrying about where the money to pay for groceries is going to come from is not acceptable. Relief is available. Rooted in equity, the Bankruptcy Code exists in recognition of the fact that sometimes times are tough and starting over is necessary. The availability of liberal bankruptcy laws has been shown to encourage entreprenuership. Whether bankruptcy is the “right thing to do” can only be determined after an evaluation of the benefit to your family vs. the perceived moral detriment of not paying back some of your debts. Take a page out of the Corleone playbook and make this a dispassionate, business oriented analysis. Make no mistake, your creditors deal with you and your account in the broader context of a well established business model. Even if you are being routinely harassed by collection calls, the motivation is business, never personal. Your creditors are attempting to strengthen their bottom line. Perhaps at the last board meeting incessant phone calls were once again determined to be the most effective way of squeezing additional money out of past due accounts. Your current treatment as well as the terms upon which your loan was made are based on clinical company procedure.

The same banks that happily accepted taxpayer bailouts refuse to modify taxpayer’s mortgages. Why? The financial incentives still aren’t there. Modifying mortgages en masse isn’t good business. Furthermore, the risk of delinquency and bankruptcy is factored into your interest rate. The color of your hair has nothing to do with it. There is nothing wrong with filing for bankruptcy if you have encountered unexpected financial hardship and can’t find a way out. Don’t let a vague sense of obligation stand in the way of relief that can help your family. As Michael Corleone would say: “it’s not personal, strictly business.”

Still not convinced? See what the Bible has to say about bankruptcy.

John O’Connor

Other recent procedural changes in the Eastern District of Michigan include a September 29, 2009 “Notice Regarding Dismissal of Case for Failure to File Petition Pursuant To 11 U.S.C. § 301 (a).”  11 U.S.C. § 301(a) states that a “voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.”  The notice recently issued by the Court states: “Effective immediately, the Court will dismiss any electronically filed case in which the petition is not filed as the lead event. Pursuant to 11 U.S.C. § 301(a), a voluntary case is commenced by the filing of a petition. If the voluntary petition is not associated with the initial entry, no case exists, therefore, the filing will be dismissed.”

The Eastern District of Michigan also recently adopted a new form for reaffirmation agreements. The form is required for all reaffirmation agreements filed on or after December 1, 2009. Failure to file the reaffirmation agreement cover sheet with a reaffirmation agreement will result in a notice of deficiency from the Bankruptcy Court Clerk providing seven days within which to correct the deficiency. Failure to correct the deficiency may result in striking the reaffirmation agreement or the scheduling of a hearing by the Court.

Detroit bankruptcy lawyers must be aware of these notices as well as other local rules and practices in the Eastern District, while bankruptcy attorneys in other jurisdictions should review their local court rules for similar changes.  The Eastern District of Michigan’s recent notices emphasize both the procedural complexity of bankruptcy cases and the need for competent counsel.

-Drew Broaddus

The amended Local Bankruptcy Rules are effective December 1, 2009. The local rules have been amended to conform to amendments to the Federal Rules of Bankruptcy Procedure adopted by the United States Supreme Court on March 26, 2009, effective December 1, 2009. The amendments to the Federal Rules of Bankruptcy Procedure clarify the way time is calculated in the federal courts by adopting a “days are days” approach to counting time versus the prior practice of excluding intervening weekends and holidays from periods of less than eight days. The amended Federal Rules of Bankruptcy Procedure count intermediate weekends and holidays for all time periods. Further, the amended Federal Rules of Bankruptcy Procedure state deadlines that are less than 30 days in multiples of seven days.

The Bankruptcy Court encourages each member of the bar to carefully review the amendments to the Federal Rules of Bankruptcy Procedure and the amendments to the Local Bankruptcy Rules. The amendments to the Federal Rules of Bankruptcy Procedure and a blacklined version of those amendments can be found here.

Detroit bankruptcy lawyers must be aware of this notice as well as other local rules and practices in the Eastern District, while bankruptcy attorneys in other jurisdictions should review their local court rules for similar changes.  The Eastern District of Michigan’s recent notice emphasizes the procedural complexity of bankruptcy cases and the need for competent counsel.

-Drew Broaddus

The report also contained some interesting statistics about pro se petitions (i.e., persons filing for bankruptcy without an attorney). For the calendar year 2007, the district had 1,251 pro se cases filed, or about 3.5% of total cases. For the calendar year 2008, there were 1,871 pro se cases filed in the district, or about 4.5% of our total cases. For the first 8 months of calendar year 2009, the number of pro se cases has grown to 2,333, almost 9% of the total.  In Chapter 7, more than 10% of the district’s  cases are now pro se. The Court noted that “[p]ro se cases require extra judicial and other resources to process through the system. They pose unique challenges to our system. The Chapter 7 Trustees have raised with the bench a number of difficulties that the processing of these cases pose for them.”

The report also contained a significant discussion of reaffirmation areements.  One of the many changes brought about by the BAPCPA in 2005 pertains to reaffirmation agreements. The responsibilities of debtors’ attorneys in connection with reaffirmation agreements were altered greatly. Subsequent to BAPCPA, the district adopted a Local Rule to govern practice in our Court regarding those reaffirmation agreements that contain what is described as the presumption of undue hardship under § 524(m) of the Bankruptcy Code. Without addressing each of the issues that has arisen from time to time concerning reaffirmation agreements, it is worth noting that there has been some divergence in the case law and in the practices among the bankruptcy courts throughout the country since BAPCPA regarding reaffirmation agreements and, in particular, the so called presumption of undue hardship under § 524(m). At the request of the bench, the Consumer Bankruptcy Association was asked to make a recommendation to the Court regarding best practices for a debtor’s counsel to follow in Chapter 7 cases regarding reaffirmation agreements. The Consumer Bankruptcy Association provided the bench with a detailed report on recommended best practices.  Related to this issue, the Court recently adopted new procedures for reaffirmation agreements.

The report also discussed recent local court rule changes and a number of other issues.  A complete copy of the report is available here.

-Drew Broaddus