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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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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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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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Beware of Bankruptcy Petition Preparers

Every now and then, a debtor will appear in bankruptcy court on a case that is set to be dismissed. The nervous debtor will stand at the podium, and the judge will ask the debtor why he or she has not filed certain required papers within the time prescribed by the Bankruptcy Code. The debtor will likely appear flustered, “I don’t know, Judge.” The judge will ask some more questions, and the debtor will often reveal that he or she does not have an attorney, but rather has paid a non-attorney bankruptcy petition preparer (BPP) a non-trivial sum of money to help them file for bankruptcy. Unfortunately, in many of these cases, the judge will have no choice but to dismiss the debtor’s case because various statutory requirements have not been satisfied. The debtor will inevitably be very disappointed, as he or she will not receive a discharge of their debts or a refund of their filing fee. Needing to file for bankruptcy can be an overwhelming experience. Hiring a BPP instead of a bankruptcy lawyer in order to save money may seem like a good idea. While it is not illegal to hire a BPP, it is not always wise. Section 110 of the Bankruptcy Code explicitly allows for debtors to hire non-attorney BPPs to type their petition and schedules. 11 U.S.C. § 110. There are some very specific limitations and disclosure requirements for BPPs. 11 U.S.C. § 110(b)-(h). For example, BPPs “may not offer a potential debtor legal advice” 11 U.S.C. § 110(e)(2), they may not use the word “legal” or similar terms in their advertisements, 11 U.S.C. §  110(f), and they are required to fill out Official Form 119 every time they help prepare documents that are filed in a case. 11 U.S.C. § 110(b)(2). Some bankruptcy courts have imposed even stricter regulations for BPPs. For example, in the Eastern District of Michigan, a BPP may charge no more than $100 for their services. Bankr. E.D. Mich. Admin. Order 10-21. If a BPP does not comply with all the requirements of Section 110 of the Bankruptcy Code, he or she may face some very steep penalties. A debtor, trustee, or U.S. Trustee may file a motion against the BPP pursuant to Sections 110(i) or 110(l) of the Bankruptcy Code. The penalties awarded under this statute may include a refund of the fee the debtor paid to the BPP and the greater of $2,000 or twice the amount of the BPP’s fee. 11 U.S.C. § 110(i). Additionally, a BPP may be required to pay up to $1500 in fines to the U.S. Trustee for each violation of Section 110 of the Bankruptcy Code if certain conditions are met. 11 U.S.C. § 110(l). The court may also enjoin (or forbid) the offending BPP from providing their services to other debtors. 11 U.S.C. § 110(j). Some BPPs have even ended up in jail for providing “services” in violation of Section 110 (see links here, here and here). While it is good that debtors who have been ripped off by unscrupulous or incompetent BPPs have some recourse, the relief offered by Section 110 of the Bankruptcy Code does nothing to help these debtors get any closer to receiving a discharge of their debts. Overall, if you are considering filing for bankruptcy, please consider hiring an experienced bankruptcy attorney who be able to competently represent you. If you cannot afford an attorney, contact the clerk’s office at your local court to see if they can refer you to a legal aid clinic. In the Chicago area, the Bankruptcy Assistance Desk or a legal aid organization such as Chicago Volunteer Legal Services may be able to help you.   If you have been a victim of a BPP, reach out to your local U.S. Trustee’s office for assistance. By cooperating with the U.S. Trustee, you may be able to recover your losses and you might be able to help prevent that BPP from harming another person like you. Read More
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Article from ABF Journal Explains how Courts have Treated Merchant Cash Advances (MCA)

In the November/December issue of the ABF Journal, attorney Jefferey Wurst explains the different types of MCAs and how Courts have ruled regarding the vehicle. According to Mr. Wurst, first there “are MCAs that advance money and get repaid solely from the collection of future receivables (assuming the risk of collection) and those that advance money and get repaid by taking daily or weekly ACH payments from the client’s bank account whether or not any receivables actually exist.” “Second are MCAs that rely on the performance of receivables found in factoring, which are generally based on true sales of the future receivables and without recourse.” Mr. Wurst goes on to explain that one of the key issues involves the characterization of the MCA as a loan or a purchase of a receivable. The answer to this question determines whether the MCA is subject to usury statutes (to the extent they exist). According to Mr. Wurst, under “New York law, the penalty for lenders making a usurious loan is not being deprived of any interest payments, as it is in many jurisdictions, but being deprived of receiving both interest and principal. In other words, the borrower gets a windfall by forgiveness of debt when it has borrowed money under usurious terms. Thus, it should not come as a surprise that when confronted with a lawsuit to recover on advances made to a merchant, that merchant attempts to claim the high cost of funds they are paying is usurious.” Mr. Wurst then explains that “[w]hether an MCA is a usurious loan first depends on whether the merchant sold the receivable or borrowed money with the receivable as collateral. Whether the sale of the receivable was a true sale under applicable law determines this.” The analysis regarding a true sale or a loan is complex and not suitable for a discussion here, but if you have any questions about how an MCA will be classified (i.e., true sale or loan), the attorneys at FactorLaw can assist. If 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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Are Health Savings Accounts Exempt from Creditor Claims in Illinois and Elsewhere?

Congress created Health Savings Accounts (HSAs) in 2003. 26 U.S.C. § 223. In the past fifteen years, Illinois courts have not issued any published decisions indicating whether funds held in a debtor’s HSA are exempted from a debtor’s bankruptcy estate or otherwise protected from creditors. As a result, it is unclear what will happen to the funds in a person’s HSA if that person files for bankruptcy in Illinois.  An HSA is “a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary . . . .” 26 U.S.C. § 223(d)(1). A person can only make contributions to an HSA if that person has a “high deductible health plan.” 26 U.S.C. § 223(c)(1)(A), which is a health plan that requires the beneficiary to pay a certain amount of expenses before coverage begins. 26 U.S.C. § 223(c)(2)(A). The beneficiary of an HSA “has liberal access to the funds – indeed, the beneficiary is entitled to distributions from the account for any purpose. However, the beneficiary will incur tax penalties unless the funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated for by insurance or otherwise.’” Leitch v. Christians (In re Leitch), 494 B.R. 918, 920 (8th Cir. B.A.P. 2013) (citations omitted). When a person files for bankruptcy protection, all of their property becomes property of their bankruptcy estate pursuant to section 541(a) of the Bankruptcy Code, 11 U.S.C. § 541(a), subject to certain exceptions. Section 541(b) of the Bankruptcy Code lists types of property that are explicitly excluded from the bankruptcy estate. 11 U.S.C. § 541(b). Additionally, debtors may be able to claim certain property as exempt under state or federal law. Whether a HSA will be considered property of a debtor’s bankruptcy estate varies from state to state. The 8th Circuit Bankruptcy Appellate Panel found that HSAs are not excluded from a debtor’s estate pursuant to section 541(b)(7) of the Bankruptcy Code. Leitch, 494 B.R. at 921. Section 541(b)(7) provides that the bankruptcy estate does not include “any amount withheld by an employer from the wages of employees or payment as contributions . . . to a health insurance plan regulated by State law whether or not subject to such title[.]” 11 U.S.C. § 541(b)(7)(A)(ii). The court noted that HSAs were created two years before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) became law and reasoned that Congress would have excluded HSAs from property of the estate in BAPCPA if it had so desired. Leitch, 494 B.R. at 921. Moreover, the B.A.P. held that “since the funds in the HSA can be used by the beneficiary or any purpose . . . an HSA is not an insurance plan regulated by state law and, therefore, the HSA is not excluded from the bankruptcy estate by 11 U.S.C. § 541(b)(7)(A)(ii).” Id. The B.A.P. also held that HSAs are not covered by the federal exemptions listed in section 522(b)(1) of the Bankruptcy Code. Id. at 921-22. Many states do not allow debtors to use the exemptions listed in section 522 of the Bankruptcy Code, and instead only allow debtors to use state law exemptions. Therefore, whether an HSA will be exempted from a debtor’s bankruptcy estate is often a function of state law. At least ten states have statutes that explicitly protect HSAs from creditors and exempt them from debtors’ bankruptcy estates: Florida, Indiana, Minnesota, Mississippi, Montana, Oregon, Tennessee, Texas, Virginia, and Washington.  Fla. Stat. Ann. § 222.22(2), Ind. Code Ann. § 34-55-10-2(c)(8), Minn. Stat. 550.37(26), Miss. Code. Ann. § 85-3-1(g), Montana Code Ann. § 25-13-608(1)(l), Or. Rev. Stat. § 18.345(o), Tenn. Code Ann. § 26-2-105(b), Tex. Prop. Code Ann. § 42.0021(a), Va. Code Ann. § 38.2-5604(B), and Wash. Rev. Code § 6.15.020(4). The exemption statutes in each of these states, except Mississippi, specifically reference the federal statute that created HSAs, 26 U.S.C. § 223. Courts have held that HSAs are not exempt from a debtor’s bankruptcy estate in several states, including Georgia, Ohio, Idaho, and Colorado, that do not explicitly include HSAs in their exemption statues. See In re Mooney, 503 B.R. 916 (Bankr. M.D. Ga. 2014); In re Lombardy, No. 11-1737, 2012 Bankr. LEXIS 827, at *12-14 (Bankr. N.D. Ohio Feb. 9, 2012), In re Stanger, 385 B.R. 758, 763-65 (Bankr. D. Idaho 2008), and In re Gardner, No. 12-12485, 2013 Bankr. LEXIS 2921 (Bankr. D. Colo. July 19, 2013). Courts in these states have declined to create a new exemption for HSAs. For example, in In re Mooney, the bankruptcy court found “nothing in [the Georgia exemption statute] expressly exempts HSAs. The Georgia Assembly has amended the exemption statute three times since the development of HSAs; none of the amendments included any director or i… Read More
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