1) There is a New Bar Date for Filing a Proof of Claim in a Chapter 11 Bankruptcy Case Filed in the Northern District of California.
Local Rule 3003-1 was amended on March 15, 2016, now requiring that all proofs of claim be filed no later than ninety (90) days after the first date set for the meeting of creditors in the bankruptcy. Prior practice was that the bar date was specially set by the debtor. With the shorter time line for filing, inattentive creditors may miss the bar date resulting in having its proof of claim disallowed and not being able to share in a distribution from the bankruptcy estate.
2) U.S. Supreme Court Expands the Possibility of Non-Dischargeability Involving Fraudulent Transfers
One of the most common ways to make a specific debt non-dischargeable under Section 523 of the Bankruptcy Code is for the creditor to prove fraud based on a representation by the debtor. However, in Husky International Electronics, Inc. v. Ritz, 578 U.S. ___, 136 S.Ct. 1581 (2016), the Court used a more expansive reading of what constitutes “actual fraud” for purposes of non-dischargeability. In Husky, while the creditor was providing goods to a company that Debtor Ritz controlled, Ritz transferred over a million dollars of funds to other companies that Ritz controlled. Ritz then filed for bankruptcy and all the lower courts found that there was no basis for piercing the corporate veil or declaring the debt non-dischargeable because Ritz had not made any false representation to the creditor. The Supreme Court reversed, finding that a fraudulent transfer can constitute “actual fraud” for purposes of Section 523 if the transfer also involved moral turpitude or other intentional wrongdoing. With the Husky ruling, creditors now have an enhanced ability to pursue debtors for non-dischargeability in bankruptcy (and possibly an easier burden of proof under state voidable transactions laws) who intentionally scheme and transfer assets to avoid their obligations.
3) Debtors Who Pay Their Attorneys with Monies from Related Companies Unknowingly Make Their Attorneys a Potential Defendant for a Fraudulent Transfer.
Recently we have been involved in several cases regarding the following generic situation.
Client is Company A and pays Attorney’s invoices. Company A is one of many related companies (call them Companies B through G). Client moves assets throughout the different related companies and at some point in time Company B begins to pay the Attorney’s invoices, instead of Company A. Inevitably Company A and B become insolvent after a large judgment is entered against them and they file for bankruptcy (even if there is no bankruptcy the recipient still has a potential problem). The bankruptcy coverts to a Chapter 7 liquidation case and the Trustee sues Attorney for receiving a fraudulent conveyance (i.e., Company B paid the invoices but received no reasonable equivalent value since the client was Company A.).
11 U.S.C. §548 and California Civil Code §3439.05 essentially state that a transfer without receiving reasonable equivalent value in return for the transfer, when the debtor is insolvent, is a fraudulent conveyance and therefore subject to disgorgement. So the point here is — a) creditors/trustees should review who actually paid the debtor’s attorney bills, there may be an opportunity to avoid the transfer(s), and b) attorneys who are getting paid by a financially distressed client, must be vigilant to make sure that the client pays their bills. Otherwise, the situation could result in the payment(s) being returned and one party being very unhappy.