» Illinois Bankruptcy

Governor of New York Limits Power of Merchant Cash Advance Lenders to Use Confessions of Judgment

As a follow-up to our series of articles on the use of Merchant Cash Advances (see here, here, and here), we learned today that New York Governor Andrew Cuomo signed a bill last week aimed at preventing predatory lenders from using the state’s court system to seize the assets of small businesses nationwide. According to Bloomberg, “the new law prohibits use of confessions of judgment against individuals and businesses located outside of the state.” As we learn more about this new legislation (as well as the efforts in Congress to limit confessions of judgment), we will update our postings. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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Seventh Circuit holds that a debtor's "contingent future interest" in tenancy by entireties property is not exempt.

In re Jaffe, 18-2726 (7th Cir. August 5, 2019), the Seventh Circuit held that a homeowner’s “contingent future interest” in an otherwise exempt form of home ownership – tenancy by the entireties – was not exempt and was instead property of his bankruptcy estate.  This decision not only resolves a dispute among lower courts regarding the exempt status of homes held in tenancy by the entireties, but it also means that a home held in tenancy by the entireties that is exempt on the bankruptcy filing date can lose that status if during the bankruptcy case the property is sold or one of the spouses passes away.     Under Illinois law, real estate jointly owned by a husband and wife can be held in a “tenancy by the entirety.” As a general rule under Illinois law, real estate held in a tenancy by the entirety is exempt from the claims asserted against one spouse.  In other words, the creditors of only one spouse cannot enforce their judgments against property owned like this.  Id. at 13 (“The main protection that Illinois law provides tenants by the entirety is that a creditor is unable to force the sale of the property to collect a debt against only one of the tenants.”). In the Jaffe case, a creditor obtained by default a $500,000 judgment against the debtor, a lawyer, in a malpractice case in 2005. The creditor recorded the judgment, giving her a lien on the debtor’s real estate. Ten years later, the debtor filed a chapter 7 petition.  In the bankruptcy case, the debtor exempted his home on the grounds that he owned it with his wife in tenancy by the entireties.  During the bankruptcy case, the debtor’s wife passed away, but the debtor continued to argue the exemption was available because, at the time he filed the bankruptcy case, the home was exempt. The Seventh Circuit analyzed the different interests related to tenancy by the entireties property and ultimately concluded, based upon Illinois law, that the debtor held not a single interest, but a bundle of rights: The Illinois legislature enumerated the precise interests tenants by the entirety enjoy individually, including the following contingent future interests: “(a) an interest as a tenant in common in the event of a divorce, (b) an interest as a joint tenant in the event that another homestead is established, and (c) a survivorship interest in the entire property in the event of the other tenant’s death.”  765 ILCS 1005/1c.  Id. at 4. The Circuit Court then analyzed whether the Bankruptcy Code exempted the entire bundle of rights, or just the right as a tenant by the entirety.  Based upon the language of § 522(b)(3)(B), the Court concluded that the “exemption applies ‘to the extent that such interests as a tenant by the entirety,’ meaning the precise interests that the debtor holds as a tenant by the entirety, are exempt under state law.”  Id. at 10. In other words, the Seventh Circuit held that the “contingent future interests”, including the right to own the property individually upon the death of one spouse, were not exempt from creditor claims.  And as the bankruptcy court noted, because the creditor “had a lien on Jaffe’s contingent future interest, she has a lien on his current interest as fee simple owner” upon the passing of Mrs. Jaffe.” See In re Jaffe, Case No. 15-39490 (Bankr. N.D. Ill. June 7, 2017).    The Seventh Circuit’s opinion in Jaffe clarifies the law in the Northern District of Illinois.  Prior to the case, several bankruptcy courts (including the bankruptcy court hearing the underlying bankruptcy case of Mr. Jaffe) had concluded that the contingent future interest was not exempt under Illinois law and that a debtor could not avoid a judgment lien that had been recorded against property held in a tenancy by the entireties.  The District Court decision reversing the bankruptcy court in the Jaffe case introduced a conflict between the lower courts in the Seventh Circuit, which now appears to have been resolved by the Circuit Court’s ruling in Jaffe.   FactorLaw’s Summary and Analysis of the Small Business Reorganization Act Mack Industries – Agenda for February 19 Omnibus Hearing Sears Bankruptcy Commences Preference Suits Mack Industries – Agenda for January 15 Omnibus Hearing Mack Industries – Agenda for December 18 Omnibus Hearing Read More
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Consumer Debt Rising

According to an article appearing today on the website for the American Bankruptcy Institute, the American middle class is falling deeper into debt to maintain a middle-class lifestyle. The ABI article is based upon a Wall Street Journal analysis. According to the ABI and WSJ: “Incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy. Consumer debt, not counting mortgages, has climbed to $4 trillion — higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding. Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages. Auto debt is up nearly 40 percent adjusting for inflation in the last decade to $1.3 trillion. And the average loan for new cars is up an inflation-adjusted 11 percent in a decade, to $32,187, according to an analysis of data from credit-reporting firm Experian. Unsecured personal loans are back in vogue, the result of competition between technology-savvy lenders and big banks for borrowers and loan volume. The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.” Read More
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Podcast - Panel for Consumer Commission discusses recommendations on BAPCPA's Credit Counseling requirement

Members of ABI’s Commission on Consumer Bankruptcy discuss the recommendations in the Final Report focused on the Code’s credit counseling and financial management course requirements, and asks the question: do the new provisions make a financial clean-slate more challenging for debtors? The round-table discussion podcast features FactorLaw’s Consumer Bankruptcy expert Ariane Holtschlag, and can be accessed below, or you can click here to go to the ABI article directly. In addition, click here to download a copy of the Final Report of the ABI Commission on Consumer Bankruptcy. Read More
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Chicago Appellate Court directs City of Chicago to release impounded vehicles when owner files Chapter 13 petition.

Seventh Circuit directs City of Chicago to release impounded vehicles and affirms holding in Thompson. Read More
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Notable parallels between the 2008-2009 financial crisis and today's high-risk alternative lending sector

This week, the American Bankruptcy Institute posted an article (which is reprinted below) identifying a growing trend that may impact a large sector of the economy: alternative lenders making risky loans. As many know, the 2008-2009 meltdown ensnared a lot of big and established financial institutions and if not for substantial government intervention the fallout would have been worse and perhaps longer-lasting. For purposes of context, a Wikipedia report states that the “financial crisis of 2007–2008, also known as the global financial crisis and the 2008 financial crisis, is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930. It began in 2007 with a crisis in the subprime mortgage market in the United States, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008. Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally. Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn, the Great Recession. The European debt crisis, a crisis in the banking system of the European countries using the euro, followed later. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US following the crisis to “promote the financial stability of the United States”. The Basel III capital and liquidity standards were adopted by countries around the world.” If one juxtaposes the above summary of the 2008-2009 crisis with the ABI’s summary of the current high-risk lending environment (see below), there are notable parallels that should make insolvency professionals take note. Of particular relevance is the current tendency of less regulated institutions to engage in risky transactions (some of which are not unlike the subprime mortgages (see above) that helped precipitate the 2008-2009 meltdown). According to the ABI: “A decade after reckless home lending nearly destroyed the financial system, the business of making risky loans is back, the New York Times reported on Tuesday. This time, the money is bypassing the traditional, and heavily regulated, banking system and flowing through a growing network of businesses that have stepped in to provide loans to parts of the economy that banks abandoned after 2008. With almost $15 trillion in assets, the shadow-banking sector in the U.S. is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy. In certain areas — including mortgages, auto lending and some business loans — shadow banks have eclipsed traditional banks, which have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble. But new problems arise when the industry depends on lenders that compete aggressively, operate with less of a cushion against losses and have fewer regulations to keep them from taking on too much risk. Recently, a chorus of industry officials and policymakers — including Federal Reserve Chair Jerome H. Powell — have started to signal that they’re watching the growth of riskier lending by these nonbanks. “We decided to regulate the banks, hoping for a more stable financial system, which doesn’t take as many risks,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. “Where the banks retreated, shadow banks stepped in.” Lately, that lending is coming from companies like Quicken Loans, loanDepot and Caliber Home Loans. Between 2009 and 2018, the share of mortgage loans made by these businesses and others like them soared from 9 percent to more than 52 percent, according to Inside Mortgage Finance. While they don’t have a nationwide regulator that ensures safety and soundness like banks do, non-banks say that they are monitored by a range of government entities, from the Consumer Financial Protection Bureau to state regulators.” Read More
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FactorLaw featured in Leading Lawyers Magazine, May 2019

An excerpt: “We are very much a family business, like many of the clients we are representing,” Factor says. “Providing top-notch service to our clients is the glue that holds us together. They’re getting the same service they would get at a major firm, but at a more affordable price, including flexible fee structures and more personalized attention.” To access the complete article, click the link below. Download Read More
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Court rejects "sufficiently rooted" test and holds bankruptcy estate does not include portion of bonus earned from prepetition employment

In In re Brown, Case No. 18-81242 (Bankr. C.D. Ill. May 9, 2019), Judge Perkins of the Central District of Illinois, concluded that property of the estate did not include that portion of a debtor’s annual bonus payable after the petition date that was related to prepetition employment. In the Brown case, the debtor filed a chapter 7 case on August 17, 2018 and was due to receive a bonus from Caterpillar in 2019 pursuant to a Short Term Incentive Plan (the “STIP”). The STIP bonus was calculated based upon work performed during 2018. The trustee argued 62.7% of the STIP bonus was property of the estate because “62.7% of the bonus is rooted in the pre-bankruptcy past.” Id. In ruling against the trustee, Judge Perkins rejected the “sufficiently rooted” test (discussed below) and concluded the STIP bonus was not estate property because the debtor did not have a pre-petition property interest in the bonus as a matter of Illinois law. Citing the seminal Whiting Pools, 462 U.S. 198 (1983), Judge Perkins first pointed out that Section 541 does not expand the rights of the debtor and instead the trustee succeeds to no greater rights than those held by the debtor on the petition date. Judge Perkins then noted that “uncertainty may arise when a property interest has its origins in the prepetition time frame but isn’t obtainable by the debtor until after bankruptcy, subject to the postpetition occurrence of one or more contingencies.” After recognizing the distinction between the occurrence of a contingency and the existence of an expectancy, Judge Perkins analyzed whether the “sufficiently rooted” test — which gained currency from a Bankruptcy Act case known as Segal v. Rochelle, 382 U.S. 375 (1966) (addressing whether tax refund was property of bankruptcy estate) — survived enactment of Section 541. Under the “sufficiently rooted” test, bankruptcy courts routinely determined whether a property right was “sufficiently rooted” in prepetition events as to make it a prepetition property interest, even when payable post-petition. Classic examples of such property interests include tax refunds, sales commissions and, of course, employment bonuses. Under the “sufficiently rooted” test, the STIP bonus probably would have been property of the estate because 62.7% of the amount related to prepetition employment services. Noting, among other authorities, that the Fifth Circuit expressly held that “the sufficiently rooted” test did not survive the enactment of Section 541 (citing In re Burgess, 438 F.3d 493, 498-99 (5th Cir. 2006)), and that the Seventh Circuit has expressed skepticism about the usefulness of the “sufficiently rooted” test even in the context of tax refunds (citing In re Meyers, 616 F.3d 626 (7th Cir. 2010)), Judge Perkins reasoned that “[i]f applicable state law provides that a potential property interest of a debtor was merely an expectancy as of the petition date, the expectancy is properly excluded from the estate without regard to whether the interest may be said to be “rooted” in the debtor’s pre-bankruptcy past.” Judge Perkins then analyzed Illinois law to determine whether a bonus plan created a right, subject to a condition, or merely an expectancy; ultimately concluding that “where an employer reserves the absolute discretion not to award a future bonus, the bonus is treated under Illinois law as an expectancy, not a present property interest.” From that premise, Judge Perkins had little difficulty concluding that the contract language determining the debtor’s entitlement to a bonus from Caterpillar “makes the bonus discretionary and disclaims any obligation to pay” and thus creates “only a bare expectancy interest. [Accordingly], [t]he Trustee takes no present property interest in any future STIP payments and no part of it can become property of the estate.” In the penultimate part of his analysis, Judge Perkins concluded that “[t]o consider the bonus to be property of the estate simply because it related to [the debtor’s] prepetition employment would be to give the bankruptcy estate more than the Debtor had on the petition date [and thus] the Debtor’s expectancy interest in the 2018 STIP bonus is not a legal or equitable interest in property as of the commencement of the case under section 541(a)(1) and is not an asset of her estate subject to the Trustee’s administration.” Id. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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The Small Business Reorganization Act

Last month, the Senate Judiciary Committee reintroduced the Small Business Reorganization Act (SB 1091). SB 1091 is intended to streamline the process for small businesses (those with debts less than $2,566,050) that wish to use Chapter 11 to reorganize. Key provisions of SB 1091 (the “SBRA”) include: Increasing the Debtors’ Ability to Negotiate a Successful Reorganization and Retain Control of the Business. Only the small business debtor may file a plan under subchapter V of the SBRA. The owner of the small business debtor may retain a stake in the company so long as the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests. If a trustee or a holder of an unsecured claim objects to the plan, the court cannot approve the plan unless the plan provides that all of the small business debtor’s projected disposable income to be received during the plan will be applied to make payments under the plan for a period of 3-5 years. Reducing Unnecessary Procedural Burdens and Costs. Unless the court for cause orders otherwise, an official committee of unsecured creditors will not be appointed and a disclosure statement will not be required. Increasing Oversight and Ensures Quick Reorganization. A standing trustee would be appointed in every small business debtor case to perform duties similar to those performed by a Chapter 12 or Chapter 13 trustee and help ensure the reorganization stays on track. The small business debtor must file a plan within 90 days of commencement, which may be extended under limited circumstances. An initial status conference would be required in every case within 60 days of commencement “to further the expeditious and economical resolution” of a SBRA case. If you would like to speak to one of our experienced attorneys regarding your business, please call (312) 878-6976 or fill out a contact form here. Read More
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Money inherited more than 180 days after petition date belongs to Chapter 13 bankruptcy estate

In Moore, the bankruptcy court for the Eastern District of Tennessee joined a majority of courts and held that money inherited outside of the 180 day window set forth in § 541 was still property of the chapter 13 estate.  In the Moore case, the debtors filed for chapter 13 relief on November 15, 2016.  The Debtor’s father passed away almost 18 months later and Mr. Moore received an inheritance of $14,76483 from his father’s estate.  The Debtors then filed a motion to retain the inheritance so they could purchase a vehicle.  The Chapter 13 Trustee objected, arguing the Debtors were seeking to retain non-exempt funds.  The legal issue for the court was whether the inheritance was property of the bankruptcy estate in light of §541, which provides that an inheritance received up to 6 months after the petition date is property of the bankruptcy estate  “The Debtors contended the inheritance I excluded from the estate because it would be excluded by § 541()(5)(A). “  Conversely, the trustee argued that in chapter 13 cases, property of the estate includes that which is brought in pursuant to §541, and also includes “all property of the kind specified in [§541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first[.] “ Noting that “There is a split in the authorities interpreting whether property inherited outside the 180-day period should be included in a chapter 13 estate,” the Moore court noted that “[t]he overwhelming majority of courts to have addressed this issue ‘agree that § 1306 modifies the § 541 time period in Chapter 13 cases” and concluded that post-petition inheritances received beyond 6 months after the petition date are also included in the bankruptcy estate. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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