California Business Bankruptcy Lawyer & Attorney : Klein DeNatale Law Firm : Bakersfield, Kern County, Central California

It's now official:  Vallejo is now the largest city in California to file for Chapter 9 protection.  Long believed to be in the works, the bay area city filed in the U.S. Bankruptcy Court for the Eastern District of Californiat in Sacramento last Friday [update: Case No. 08-26813; petition and schedules available through PACER].  As described in the San Francisco Chronicle,

This Bay Area suburb of about 120,000 people faces a $16 million deficit in its fiscal year starting July 1. Bankruptcy will keep services running and prevent creditors from suing the city while officials devise a plan to get back on solid financial footing.

Like Vallejo, many U.S. cities are saddled with labor contracts that offer salaries, overtime pay, pensions and health benefits they say they can't afford. Those expenses are expected to balloon as health care costs soar and employees retire earlier and live longer.

Vallejo officials hope the bankruptcy judge will allow the city to rewrite its labor contracts and bring compensation down. If they're successful, other cities may follow their lead, experts say.

As one city official put it, "Vallejo has been spending beyond its means for more than 15 years," said J.D. Miller, a financial planner and longtime Vallejo resident who served on the budget committee. "We've acted like someone who lives their life and spends their money as if their job will always be there."

As the budget crisis takes further hold of California, can other cities be far behind Vallejo?

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As the subprime crisis deepens and grows and the potential for recession increases, the effects are seeping into other industries as consumers are tightening their belts in order to afford food and gas.  Michael Barbaro of the New York Times discussed the effects on retailers in a recent article:

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

Our own insolvency practice here in Bakersfield has felt the impact of this upsurge in bankruptcy filings generally, and retailers in particular.  Recently the firm has filed two new Chapter 11 cases with another ready in the next week or so (an incredible rate for a relatively small market).  It appears that the window for bankruptcy attorneys to take a vacation has passed and the ramp up for coping with increased case loads must shift into high gear as more and more regional retailers enter the "zone of insolvency" and seek the help of a bankruptcy professional. 

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Failure, or in this case refusal, to file bankruptcy cases electronically can jeopardize your bar card.  The Kansas Supreme Court has suspended an attorney for, in part, refusing to e-file bankruptcy cases for three clients:

The Kansas Supreme Court held that the lawyer, Stephen D. Harris, violated his duty to represent his clients with competence, diligence and promptness. The court ordered a suspension because of the e-filing problem as well as a second complaint that he mishandled a civil case, Legal Blog Watch reports.

New rules took effect in September 2004 requiring all bankruptcy pleadings to be filed electronically. But the lawyer didn’t comply and tried to file a case the old-fashioned way four months later, Legal Blog Watch reports, citing a report on the Legal Profession Blog.

The bankruptcy court ordered the lawyer to obtain training and a login for electronic filing in the next 30 days, but he didn’t comply, the Kansas Supreme Court said in its March 28 opinion. Instead he tried to file a second case by paper pleadings and received yet another warning. A third client who was unhappy with the lawyer’s failure to e-file for him filed a disciplinary complaint. Harris did not return the complaining client's $800 advance fee, the court said.

The full opinion of the Kansas Supreme Court can be found by clicking here.

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As if the increase in filings under all chapter of the bankruptcy code and the heavy workload we are all experiencing weren't enough evidence of the demand for competent bankruptcy counsel, a new survey conducted by a recruiting firm and discussed in the ABA Journal confirms that fact:

A new survey has found that lawyers expect bankruptcy to be the hottest growth area for law firms this year. That’s no secret to law firm managers who are already beefing up bankruptcy practices.

One out of four lawyers surveyed said the fastest area of growth would be in bankruptcy work, exceeding the number who designated corporate governance and litigation as the sectors most likely to see increases, the Wall Street Journal reports. More than 300 lawyers from large law firms responded to the survey by Robert Half Legal.

Managers at two law firms told the newspaper they are already adding more lawyers to their bankruptcy and restructuring departments.

Gregory Milmoe, the co-leader of the corporate restructuring department at Skadden, Arps, Slate Meagher & Flom in New York City, said demand for bankruptcy services at his firm has “emphatically increased.” His group has increased by 17 lawyers and he expects three more will be added over the next two months. In January and February, the department billed 45 percent more hours than the same period last year.

Marshall Huebner, who co-chairs the bankruptcy group at Davis Polk & Wardwell, said his lawyers are “extremely busy.” The firm cross-trains lawyers and has moved 15 of them from banking and litigation work over to the bankruptcy department.

The survey results are good news for lawyers with three to five years of experience in bankruptcy practice who want to move to a new job, said Charles Volkert, executive director of Robert Half Legal.

"Hands-on experience really matters,” he told the Wall Street Journal. “Legal professionals who are able to demonstrate a proven track record in that area are in demand."

Now more than ever is a great time for bankruptcy practitioners.  Keep on truckin'!

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After a hectic few weeks of actual law practice, I am back in the blog saddle once again. This time I want to discuss an issue that, although not strictly speaking a bankruptcy issue, significantly impacts the practice of all bankruptcy professionals: electronic discovery. I will address this issue in a series of posts giving you what I think are the most important things for the bankruptcy professional to initially understand about the handling and production of electronically stored information.

As of December 1, 2006, the Federal Rules of Civil Procedure amendments dealing with electronic discovery went into effect. Those Rules, of course, are incorporated into the Federal Rules of Bankruptcy Procedure. In today’s world of computers, networks, and electronic storage of information, the impact that those technologies have on management of information, and potentially the marshaling of evidence for litigation, is huge. The amendment of the Rules is the judiciary’s first attempt at trying to address these mediums outside conflicting court decisions.

What is Electronically Stored Information?

First, it is important to know what it is we are talking about. So, what is Electronically Stored Information? Electronically Stored Information (“ESI”) is any electronic data stored on various media types:

• It exists in our computers, computer peripherals (like printers and fax machines), PDAs, as well as pagers and wireless phones.
• It also resides in storage on disks, back-up tapes or removable drives, CDs, and other forms of media.
• It also exists in a great deal of hidden data in areas such as “metadata,” system data, and deleted data seemingly overwritten.

One important question related to the definition of ESI that is unanswered by the Rules or case law is this: are web-based e-mail programs (e.g., Hotmail, AOL, etc.) used by employees ESI of their employer? In other words, would your client, the client’s employee, or the email provider, have to provide the contents of the email account if the employee accessed it at work, even though the account is ostensibly the employee’s private account? Is it the employer's ESI at that point?  If you have an answer to this question I would love to hear from you via a comment to this post.

Why is ESI relevant to my bankruptcy practice?

ESI is relevant to all bankruptcy practitioners because it raises issues involving preservation, production, and privilege.  In that regard, it is relevant to litigation, transactional, business counseling, and reorganization practice:

Under the new rules, and in general, any competent business planning and counseling attorney must take into account the client's system for managing, storing, and disposing of ESI.  In the old days, firms would keep paper files that, if bulky, were easy to store and made the locating of relevant information fairly easy.  But today, with the advent of electronic means of storage, the ability to find relevant information is only as good as the planning and implementation of a logical storage system.

In this vein, it is essential for all business counseling and reorganization attorneys to make sure their clients have updated and current Document Retention Policies.  This document makes explicit a firm's policies and procedures regarding the storage and, importantly, the scheduled destruction of data.  It is vital, as the Rules allow, to implement a reasonable scheduled destruction policy.  Even more important, however, than the creation of a Policy, is making sure the firm actually FOLLOWS the Policy.  The provision for proper handling and destruction of documents is of little use if the organization doesn't use it.

Related to that, it is important for any business to have a written policy governing the use of company ESI.  The policy must address employees’ personal use of company email and whether employees at work may use web-based e-mail.  This is important to prevent transmission of information out of the company in unplanned ways.  It also must make clear that the company maintains ownership of ESI.  The policy should also state that there is no employee expectation of privacy

Once a bankruptcy petition is filed, and the preference litigation eventually ensues, the above described policies come into play.  Any bankruptcy practitioner knows that the filing of a bankruptcy petition, if not in existence already, will lead to litigation.  As a result, bankruptcy practitioners have a duty to inform their client's to preserve any and all ESI in anticipation of that litigation.  This is prudent, because if competent counsel is representing the creditors or, if appointed, the trustee a Litigation Hold letter will arrive instructing you to do just that.  Conversely, you may find yourself in the position of issuing a Litigation Hold letter that instructs the other side of their duty to preserve ESI.  In any event, it is crucial that ESI is considered from the start, especially when dealing with large entities, to prevent lengthy discovery battles and the spoliation of evidence.

ESI poses a serious threat to the attorney-client and the work product privilege.  Ordinarily, when ESI is produced it is not completely vetted to cull out any privileged information.  The Rules provide for this situation by providing for a "clawback" agreement between the parties that requires the return of any privileged information produced.  But, in reality the bell cannot be unrung and the better approach is to not produce privileged information in the first place.  This can be more easily managed if a detailed and logical document retention policy is implemented, aiding in the search of ESI.

Next time I will address more in depth the duties of an attorney with regard to ESI and the Rules themselves.  Stay tuned.

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When given the choice between accepting millions of dollars in cash or an "equivalent" value of stock in a bankrupt corporation, which would you choose?  If you said cash, then you are in agreement with the former CEO and current chairman of Delphi.  That corporation's plan of reorganization is being scrutinized by the New York Bankruptcy Court in Manhattan and provides Steve Miller an $8.3 million "emergence" from chapter 11 bonus.  In total, the plan provides $87 million in emergence bonuses to executives.  

The IUE-CWA union objected to the provision on the grounds that it was too high and as part of a proposed settlement of the objection asked if Miller would accept stock in lieu of cash.  In answering Miller stated that "I decided I would accept it as cash.  I would have a preference for cash."  "So would the creditors," was the union's lawyer's response.  More on this story can be found here.

How could Delphi expect that such exorbitant bonuses would not be questioned?  Does an executive really deserve a bonus for leading a bankrupt organization out of Chapter 11; especially when he was the one at the helm when it entered bankruptcy?  The union obviously doesn't think so, considering that Delphi may have $8.65 billion in financing for operations going forward out of bankruptcy is the $8.3 million to the former CEO of any significant consequence other than emotionally?  I would say probably not.  Rarely is the compensation for executives subject to review by union or others, however, so the bankruptcy proceeding provides the perfect opportunity for the union and its lawyers to shine a spotlight on executive compensation and question its merit.  I can't say that I blame them.

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There is an interesting statistical tid-bit posted on the American Bankruptcy Institute web site today concerning the increase in consumer bankruptcy filings and their connection to the sub prime mortgage crisis: 

U.S. consumer bankruptcy filings increased more than 30 percent nationwide in January from the same period a year ago, according to the ABI relying on data from the National Bankruptcy Research Center (NBKRC). While the consumer filings for January increased from the previous year, the data showed that the overall January consumer filing totals were flat from December. Chapter 13 filings constituted 40.05 percent of all consumer cases in January, a slight increase over December. “With over one million more subprime adjustable-rate mortgages due to reset during 2008, the payment shock for many households could lead to higher bankruptcies this year,” said ABI Executive Director Samuel J. Gerdano. The overall consumer filing total for the 2007 calendar year (Jan. 1 – Dec. 31, 2007) reached 801,840, nearly a 40 percent increase from the 573,203 filings recorded during the similar period in 2006. Click here to view the updated monthly consumer filing charts.

With consumer cases building in volume, it is logical to conclude that Chapter 11 filings will increase, especially for businesses involved in residential construction and mortgage lenders.  One example of the fallout from the mortgage debacle also appears on the ABI web site just below the above story:

New Century Financial Corp. and its creditors filed a chapter 11 plan yesterday that does not say how the company plans to pay creditors who have filed $35 billion in claims against it, the Associated Press reported yesterday. Once one of the country's largest subprime lenders, New Century raised only about $235 million by selling assets in its bankruptcy liquidation, according to documents filed Saturday in the U.S. Bankruptcy Court in Wilmington, Del. New Century's chapter 11 plan said that negotiations are underway that could cut the amount of claims filed in the case. Creditors filed $23.7 billion in secured claims and $10.5 billion in unsecured claims. Read more.

Another example of sub prime mortgage related failures is the Chapter 11 filing on friday of Wickes Furniture as noted in the Chicago Tribune:

Wickes Furniture Co., hit by the downturn that has hit furniture retailers in the wake of the housing industry's big slump, filed Sunday for Chapter 11 bankruptcy protection.

Wickes, based in Wheeling, is owned by Sun Capital Partners Inc., a Boca Raton investment firm that specializes in leveraged buyouts and other transactions.

In its filing with the federal bankruptcy court in Wilmington, Del., Wickes declared that it has assets of between $10 million and $50 million, and estimated its liabilities at between $50 million and $100 million.

The trade magazine Furniture Today reported in mid-January that Wickes Furniture was asking suppliers to sign an agreement that would postpone the company's repayment of overdue debt until mid-2009.

When viewing these sub prime mortgage related bankruptcy news items, one can't help but get the feeling that this is just the tip of the iceberg.  Things could be become very busy very fast for all reorganization professionals.

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Welcome back and Happy New Year!  After a short break it is nice to be back at the keyboard.  This is the fourth and final installment in the Chapter 12 Tutorial:  the discharge.

After completing all payments under the chapter 12 plan, the debtor will receive a discharge as long as the debtor certifies that all domestic support obligations, if any, have been paid.  What is a discharge?  The discharge is the whole point.  The discharge has the effect of freeing the debtor, with limited exceptions, from all debts provided for by the plan, allowed under section 503, or disallowed under section 502.  Your creditors who were provided for under the plan, whether in full or in part, may no longer seek repayment from you regarding the discharged debts.  The slate is wiped clean.

Certain categories of debts are not discharged in chapter 12 proceedings.  11 U.S.C. § 1228(a). Those categories include:

• debts for willful and malicious injury to person or property;
• debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated; and
• debts from fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.

The bankruptcy law regarding the scope of a chapter 12 discharge is complex, however, and debtors should consult competent legal counsel in this regard prior to filing.  Those debts which will not be discharged should be paid in full under a plan.  With respect to secured obligations, those debts may be paid beyond the end of the plan payment period under a separate agreement and, accordingly, are not discharged.

But what if you cannot make your plan payments, can you still get a discharge?  The court may grant a “hardship discharge” to a chapter 12 debtor even though the debtor has failed to complete plan payments. 11 U.S.C. § 1228(b).  Generally, a hardship discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor. Creditors must have received at least as much as they would have received in a chapter 7 liquidation case, and the debtor must be unable to modify the plan.  For example, injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge.  The hardship discharge does not apply to any debts that are nondischargeable in a chapter 7 case, 11 U.S.C. § 523.

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A Chapter 12 debtor must file a repayment plan no later than 90 days after the petition date unless the court grants an extension due to circumstances "for which the debtor should not justly be held accountable." 11 U.S.C. § 1221.  The plan provides for payments of fixed amounts to the trustee on a regular basis and must be approved by the Court.  The trustee then distributes the funds to creditors according to the terms of the plan, which typically pays creditors some amount less than 100 cents on the dollar.

There are three types of claims that must be provided for in the plan:

• Creditors holding priority claims are granted special status by the bankruptcy law, such as claims for back taxes, domestice support obligations, such as child support, and the costs of the bankruptcy proceeding, including the fees of the attorneys and the trustee.  11 U.S.C. § 507;
• Secured claims are those for which the creditor has the right to liquidate certain property if the debtor does not pay the underlying debt, such as loans given secured by real property or equipment; and
• Unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.

A chapter 12 plan usually provides for a three or, if the Court allows, five year repayment period.  The plan must provide for full payment of all priority claims except for three exceptions:

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