The Bankruptcy Lawyers Blog

As you prepare your client's bankruptcy petition to submit to the court, you need to be aware of the current debate in the bankruptcy courts concerning credit card payments as an avoidable preference. Bruce S. Nathan and Scott Cargill explore this courtroom split in their joint article published in the October edition of the American Bankruptcy Institute Journal.

In the article, Nathan and Cargill point out that courts are debating the issue of whether a debtor's payment by credit card or a balance-transfer checked issued by a credit card issuer is considered to be an avoidable preference under Section 547 of the Bankruptcy Code. This question usually arises under the following circumstances described in the article. During the preference period, the debtor directs a payment to be made to a creditor to pay down or pay off an existing debt. The debtor directs the credit card issuer to make the payment on the debtor's behalf.  The key issue in this transaction being disputed among the courts is whether the payment is considered a "transfer of an interest of the debtor in property" under Section 547(b).

In a mountain of case law, the majority of courts have decided that payments made by credit cards are transfers of interest in debtor property and therefore constitute an avoidable preference. However, Nathan and Cargill point out there is a growing judicial movement to redefine this issue of preference liability.  In their review of Parks v. FIA Card Services (In re Marshall), 372 B.R. 511 (Bankr. D. Kan. 2007), it is pointed out that the Marshall  Court rejected the argument that a credit card payment was a transfer of an interest of debtor property and was subject to an avoidable preference because the credit card company, and not the debtor, paid the creditor. The court in Marshall reasoned that there was no transfer of an interest in debtor property to create an avoidable preference.

As the debate continues, it would be a good idea for you to make sure that you are familiar with the body of case law addressing this issue in your jurisdiction. It would also be helpful to explore decisions handed down by courts in other jurisdictions to gain a full body of knowledge on this issue.

How the courts in your jurisdiction view debtor credit card payments to creditors within the preference period will definitely play a role in whether or not your client may incur preference liability.

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When representing your client in bankruptcy court, you may have the distinct pleasure of either filing or responding to a motion for withdrawal of the reference. The motion to withdraw the reference serves an important purpose in bankruptcy law and can have a huge impact on your client's case.

According to the 1984 Amendments to the Bankruptcy Code, Article III district courts retain bankruptcy jurisdiction. Therefore, a party may be required to litigate matters in this arena that were previously heard by bankruptcy courts. In this setting, Title 28 of the United States Code, Section 157 authorizes the district court to withdraw a reference to the bankruptcy court under certain circumstances.

The moving party must file the motion with the bankruptcy court and the clerk of the court will then transfer the motion to the appropriate district court. The motion will then be heard by the district court and it will be in the district court's sole discretion whether to grant or deny the motion. Keep in mind that the bankruptcy court can also submit a recommendation as to whether the district court should withdraw the reference. The withdrawal will apply to both core and non-core proceedings.

You should also know that there are two kinds of withdrawals: mandatory and discretionary. In a mandatory withdrawal, the district court must withdraw the reference if there is an unavoidable nexus between the bankruptcy issue and federal law affecting interstate commerce, or where the matter would result in liquidation of a claim for personal injury or wrongful death. See 28 U.S.C. Section 157(d). A discretionary withdrawal of the reference can be based on any grounds. According to 28 U.S.C. Section 157(d), a discretionary withdrawal must be accompanied by a showing of cause.

 A motion to withdraw the reference may be a useful tool for your client, especially when a demand for a jury trial is warranted. However, the decision to file a motion to withdraw should not be taken lightly. In a nutshell, you are telling the bankruptcy court, that it has no jurisdiction, or should not exercise jurisdiction in your client's case. So, if you are filing a motion to withdraw, make sure that your client's position is solid and rightfully belongs in the district court.

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At first glance, bankruptcy law is not one of those practice areas that conjure ideas of ethical concerns. After all, the noble duty of a consumer bankruptcy attorney is to assist their clients in getting a fresh start financially. What could be criminal about that? To explore the little known underworld of bankruptcy crime, I recommend that you read Chip Bowles' article entitled CSI Bankruptcy: The Hard Road from Dealing with Troubled Clients to Living with Troubled Cellmates."  Chip's article is printed in the current October addition of American Bankruptcy Institute Journal.

In the article, he reminds practitioners that the "rules" of ethics for bankruptcy attorneys are not found in title 11 of the U.S. Code, but in title 18, which are the laws governing federal crimes. Specifically, the section related to bankruptcy attorney behavior can be found at 18 U.S.C. Sections 152-157. Relevant case law cited in the article offers sound proof of the perils a bankruptcy attorney can face if dishonest tactics are used:

• See United States v. Grundy and Thornburgh, 7 U.S. 337 (1806).  In this case, the court discussed advice on denying ownership of a vessel.
• See United States v. Sullivan, 522 F.3d 967 (9th Cir. 2008). The bankruptcy attorney in this case was convicted of fraudulent concealment of property of the bankruptcy estate under 18 U.S.C. Section 152.

These cases offer keys examples of unethical behavior and the consequences of that behavior. Chip points out that while there is not a huge number of cases reported where bankruptcy attorneys have been convicted of bankruptcy crimes, there are a large number of cases where attorneys have departed from the straight and narrow path of the rule of ethics. While we want to vigorously advocate on behalf of our clients, deconstructing the given rules will create a slippery slope that will only hinder competent client representation.

So, my advice - keep it clean,  offer stellar representation to your clients, and preserve your integrity in the process.

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As you prepare to present documentation to the bankruptcy court for your client, be aware of the fact that the court does have the authority to abstain from hearing issues presented in the bankruptcy case or the whole case entirely. This action is called an abstention and this authority is granted to the bankruptcy court under Title 11, United States Code, Section 305.  As a practitioner, it is essential that you understand the concept of the abstention. Get ready for your crash course.

The Motion

The motion for an abstention by the bankruptcy court must be filed within 20 days following the date of the first meeting of creditors. If the motion to abstain is for an adversary proceeding, the filing deadline is not later than the date for filing an answer or within 20 days from the filing of an application for removal.

Types of Abstentions

There are two types of abstentions the bankruptcy court may grant - a mandatory abstention or a discretionary abstention.

Mandatory Abstention:  If there is an issue before the bankruptcy court based upon a state law cause of action, you may want to move for a mandatory abstention if:

• The action is related to the bankruptcy case, but  does not arise under Title 11;
• The action could not have been brought in federal court, but for the bankruptcy; and
• The proceeding is commenced, and can be timely adjudicated  in a state forum.

Prior to making a decision on the mandatory abstention, the court must first decide if the issue presented is non-core in nature.

Discretionary Abstention:  Under 28 U.S.C. Section 1334(c)(1), the discretionary abstention will apply to all categories of civil proceedings. The bankruptcy court will look (using a flexible standard) to see if a particular proceeding would be handled best outside its jurisdiction.  The discretionary abstention is applicable to both core and non-core matters before the court.

The majority of bankruptcy courts follow the philosophy that the abstention should only be granted where  the suspension of the action is in the best interest of the debtor(s) and the creditors. So, if you are preparing to present a Motion for Abstention to the court or submitting an objection, it is best to weigh all factors that could possibly affect the court's decision.

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With the economy being in such a tailspin, looks can sometimes be deceiving from a practitioner's view. While more clients may come to you with the need to file bankruptcy, it is not a good idea for you to prematurely break the bank in professional or personal spending.

Think about it - clients coming your way seeking to file bankruptcy are already having a tough time paying their bills. As the lawyer handling the bankruptcy proceeding, you are expecting to be paid for your services as well. Your clients might find this difficult to do in their current financial situation.  Taking a realistic approach to this possible scenario means that you must continue to be vigilant in making good investments with firm dollars and in streamlining office procedures.

So before you hire new staff, take the extra vacation, or lease the new car, be aware that these decisions could come back to haunt you later. The name of the game is wise spending, not big spending. Your careful planning now will set the stage for greater returns later.

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When a potential client steps into your office, and says that he or she wants to file for bankruptcy, your knowledge and experience as a bankruptcy attorney takes center stage. The person that has come to you for help is depending on you to assist them in navigating through the choppy waters of financial distress. Keeping your client on course throughout the bankruptcy process does not have to be a difficult task. There are some things you can do to make sure that  your client sails smoothly through the bankruptcy procedures.

Initially, you want to know why your client wants to file for bankruptcy. Make sure that you review with your client those debts that are non-dischargeable under bankruptcy law. Also, have your client complete a pre-filing questionnaire. The pre-filing questionnaire will help you understand what the assets and liabilities are for your client.

If, after consultation, your client decides that bankrutpcy is the right way to go, the next order of business is deciding which chapter to file under. For individual filers, the choices usually are Chapter 7 or Chapter 13. Knowing which is best for your client will require that you apply the specific facts and number crunching within the statutory requirements of each chapter. It is of vital importance that during this process, your client is open and honest with you about their financial matters. Finally, make sure that you check within your specific state for local rule changes and form updates.

Your client may already feel a certain degree of stress in the current financial climate. You have the opportunity to create some breathing room for economic recovery and stress relief by providing proper guidance through the bankruptcy proceedings.

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The Executive Office for U.S. Trustees (EOUST) has issued a final ruling which requires uniform forms for the final reports submitted by trustees handling Chapter 7, 12, and 13 cases. The rule will take effect April 1, 2009.

The Attorney General is obligated to issue rules requiring uniform forms for final reports by trustees involved in Chapter 7, 12, and 13 of the Bankruptcy Code. As stated in the Federal Register, The BAPCPA requires the rule to strike the best achievable practical balance between (1) the reasonable needs of the public for information about the operational results of the Federal bankruptcy system, (2) economy, simplicity, and lack of undue burden on persons with a duty to file these reports, and (3) appropriate privacy concerns and safeguards. 

This rule is known as Section 602 of the BAPCPA and codified at 28 U.S.C. 589b. To read more, refer to regulations.gov.

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Kudos to the House and Senate for passing the National Guard and Reservists Debt Relief Act of 2008. This Act suspends the bankruptcy means test for 18 months for those who qualify, after September 11, 2001, and have been called to active duty or to perform a homeland defense activity for not less than 90 days.

This bill was originally sponsored by Senators Dick Durbin (D-Ill), Patrick J. Leahy (D-Vt.), and Orrin Hatch (R-Utah). The bill passed the Senate by Unanimous Consent on September 30th. The House approved the bill by roll call vote on October 3rd. On October 9th, the bill was presented to President Bush to sign into law.

I am sure that many of you will agree that cutting through the red tape for members of our National Guard and Reservists is the right thing to do in tough economic times. While this bill is not a bailout for ordinary Americans in financial dire straits, its passage by the House and Senate does recognizes the fact that those who protect and serve our country are worth assisting with a fresh start.

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