Help! Should My Business File for Bankruptcy Protection?

Evan Lee

John Van Swearingen

By Evan Lee and John Van Swearingen

This article has been republished with permission from Waldrep LLP.

It is July of 2020, and domestic and international news cycles are full of stories of global pandemic, record unemployment, and an uncertain path towards international economic recovery. In light of the extraordinary circumstances being reported, it is important to remember that, in more mundane (or even strong) economic conditions, businesses and individuals have always found it necessary to avail themselves of bankruptcy protections.

Externalities, such as poor market conditions and pandemics, often serve to exacerbate existing financial issues. In fact, this May, clothing retailers J.Crew, Neiman Marcus, and J.C. Penney all filed petitions for Chapter 11 Reorganization, after years of struggling sales coupled with recent store closures, the result of the COVID-19 pandemic. Several other notable retailers have followed suit. However, internal issues, absent such externalities, are typically the primary drivers of business bankruptcies.  A business may suffer from inflexible management or adhere to strategies that prove unsuccessful—the familiar names of department stores and other brick-and-mortar retail giants have graced the news with bankruptcies throughout the past decade. A business may struggle with cash flow, have its access to financing cut off, or may be overburdened with uneconomical contracts. Assets that could be liquidated to increase cash flow may be encumbered by liens, making those assets unattractive to buyers.

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NextGen CM/ECF – Citation Recognition Tips and Tricks

By Shelley Abel and Sarah Scholz

E-filing has improved the lives of lawyers everywhere. Traveling when that brief is due? You can file from the vacation house. Still fine-tuning after business hours? The court is always open! CM/ECF has been crucial for the expeditious filing of petitions and pleadings and for reducing paper record requirements for the federal courts. It has been good news for bankruptcy judges, too—they no longer accept petitions delivered to them at home, as multiple judges would do for chapter 11 emergency filings!

CM/ECF is upgrading to NextGen CM/ECF in federal courts across the country. As of October 2019, the bankruptcy courts in the Eastern and Western Districts of North Carolina have deployed NextGen CM/ECF. The Middle District of North Carolina has a projected go-live date in late spring or early summer 2020.

For external users, the only noticeable NextGen CM/ECF change may relate to “Central Sign-On,” a new feature that allows attorneys to maintain one filing account across all NextGen courts (appellate, district, and bankruptcy) and through all job transitions.

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Shielding Fraud Judgments from Discharge: Making your Case Before the Petition Date

By Cole Hayes

Your client bought into an existing business after reviewing the books, which showed a six-figure net revenue. He was shown letters of intent from eight new customers promising to double that figure in a year. Unfortunately, it was all a sham; the business had not actually turned a profit since 2015. Your client has a slam dunk fraud claim and will easily be awarded punitive damages.

After negotiating a substantial contingency fee, you plead every cause of action you can come up with: breach of contract, fraud, unfair and deceptive practices, negligence, negligent misrepresentation, breach of fiduciary duty, etc. You collect dozens of boxes of documentary evidence, depose former employees, the defendant, his wife, and the manager of the casino in Atlantic City where they blew your client’s “investment” playing craps.

After the defendant knocked out a few of your claims prior to the trial, opening arguments begin. Two weeks of testimony later, you are sitting with a coy smile as the superior court judge reads the pattern jury instructions to the twelve good folks who will certainly see through the defendant’s fairy-tale and award your client a hefty judgment. They do, of course, and after just three minutes.

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2019 Outstanding Achievement in Pro Bono Award

By Rebecca F. Redwine

Last year marked the fifth year that the Pro Bono Committee of the NCBA Bankruptcy Section presented one of its members with the Outstanding Achievement in Pro Bono Award.  Prior award winners include Ciara Rogers (2015), Jennifer Bennington (2016), Matt Crow (2017), and Michael Martinez (2018). Our committee reviewed several incredible nominations, and narrowed it down to the 2019 recipient, Lance Martin with Ward & Smith in Asheville, NC.

Lance received his JD from Tulane University Law School in 1995. He is a Section member, serves on the Bankruptcy Council and is board certified in Business Bankruptcy. He has worked with Pisgah Legal Services in the Mountain Area Volunteer Lawyers Program as a volunteer attorney since 2011.  Pisgah Legal Services provides free civil legal aid to more than 16,000 people in Western North Carolina each year. Lance was recently honored with their Outstanding Volunteer Lawyer Award. Our congratulations goes to Lance for his dedicated service.

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A Trustee in IRS Clothing

By Abigail Henderson

In addition to explicitly creating certain procedures and means of protection for debtors and creditors in bankruptcy, Bankruptcy Code provisions define the Trustee’s role and the extent of the Trustee’s powers in bankruptcy proceedings. The effect of the Code is twofold: it both equips the Trustee with the powers necessary to perform the Trustee’s role and, at least historically, has allowed North Carolina creditors and transferees to find some assurance that after four years, they are no longer exposed to the risk of an avoidance action. Recently, however, courts have increasingly adopted case law that expands the Trustee’s reach and undermines the four-year safe harbor for transferees.

Section 544(b) of the Bankruptcy Code provides the Trustee the authority to avoid any transfers to unsecured creditors by the debtor which are voidable under “applicable law by a creditor holding an unsecured claim.” Traditionally, this has meant that in cases in North Carolina the Trustees could avail themselves of the statute of limitations provided for in North Carolina’s Uniform Voidable Transactions Act—four years from when the transfer was made or, in certain circumstances, a year after the transfer was or reasonably should have been discovered.

However, as of late, Trustees across the country have begun to use section 544(b) to assume the benefits not just of the state law on voidable transfers, but also the those afforded to the IRS under both the Federal Debt Collections Procedures Act (“FDCPA”) and the Internal Revenue Code (“IRC”) in cases where the IRS has an unsecured claim against the estate. This adds several more means of recovery to Trustees, including but not limited to the ten-year look-back period for voiding transactions under the IRC or, as most recently applied in South Carolina, by avoiding transfer by disclaimer.

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Register Now for the 42nd Annual Bankruptcy Institute

By Bankruptcy Section Editors

Don’t miss the 2019 North Carolina Bankruptcy Institute, November 22-23, 2019, in Wilmington! Not only is this a great opportunity to network with your colleagues across the state, but the seminar itself includes, among other things:

  • Roundtable discussions with North Carolina’s sitting bankruptcy judges;
  • A history panel discussion with two retired North Carolina bankruptcy judges and a Lifetime Achievement Award winner, covering such topics as why we have a BA but no BAP;
  • A keynote presentation from Irving Picard, the trustee in the Bernie Madoff case;
  • A mock trial presentation;
  • Your NC State Bar required ethics, technology, and mental health hours; and
  • Up-to-date information on the latest legislation impacting your practice.

Plus, enjoy the newly renovated Hotel Ballast on the riverfront in beautiful Wilmington at an unbelievable rate of $149 plus taxes.

Registration information and the full agenda are available here.

We hope to see you there!

Margaret Westbrook and Pam McAfee
Course Planners

Report from the First Bankruptcy Section Council Meeting

By John Small

Dear Members of the Bankruptcy Section:

The first Bankruptcy Section Council meeting was held on August 22 in Raleigh. The Council adopted the Section’s budget for 2019-20 fiscal year. The budget provides for more funds for networking events and for certain costs related to the 2019 Annual Bankruptcy Institute, including $4,000 to reduce the cost of the annual seminar, keeping the price of the annual seminar under $500 for those registering as section members at the early bird rate.

The Council received a report from Pam McAfee and Margaret Westbrook, co-chairs for planning the 2019 Annual Bankruptcy Institute to be held in Wilmington on November 22-23. The keynote speaker will be Irving Picard, who is the trustee in the Bernie Madoff bankruptcy cases. This seminar will also feature new formats, including a judge’s roundtable and a trial demonstration. We hope to see you at the seminar and the networking events in Wilmington.

The Section’s new Networking Committee reported on its initial activities and future plans for this year. The Committee is seeking to have networking events in each district, in addition to the networking events associated with the Annual Bankruptcy Institute and the Council meetings. It is currently working to schedule an event on Thursday night of the Annual Bankruptcy Institute to welcome participants and provide opportunities to connect with others. Please contact one of the Committee chairs—Cindy Oliver, Samantha Brumbaugh, or Andy Houston—with any other ideas you may have for networking events.

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4th Circuit Overrules Own Precedent, Holds Certain Primary Residence Claims Can Be Crammed Down in Chapter 13 Bankruptcies

By Daniel Cohn

The general rule in bankruptcy is that debtors cannot cram down loans secured only by mortgages on their primary residences. But wait, “what’s a cram down?” you ask. For non-bankruptcy folks, a cram down is where a debtor bifurcates a creditor’s claim into a secured claim (in the amount of the value of the property) and an unsecured claim (for the balance of the outstanding debt above the value of the property), paying the secured claim in full and paying the unsecured claim pro rata along with other general unsecured creditors. Take this example: at the time of bankruptcy filing, a lender is owed $150,000, but the property is worth only $100,000. The general rule in bankruptcy is that if the property is the debtor’s primary residence and the lender’s only collateral, the lender has a secured claim of the full $150,000. Otherwise, the debtor could cram the lender down, giving the lender a secured claim of only $100,000 that would be paid in full, and an unsecured claim of $50,000 that would be paid pennies on the dollar. Thus, we can see the obvious benefit to debtors and the obvious detriment to creditors of the powerful cram down option.

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Seeking Nominations For the 2019 Bankruptcy Pro Bono Award

By Rebecca F. Redwine

Bankruptcy attorneys bring renewed hope and greater stability to our NC communities through skillful pro bono work. Excellence in this vital task deserves to be acknowledged, and the North Carolina Bar Association Bankruptcy Law Section will be celebrating the exemplary pro bono efforts of at least one of its own on Nov. 22 at the 42nd Annual Bankruptcy Institute in Wilmington.

To that end, the Bankruptcy Law Section is now seeking third-party and self nominations for the 2019 Pro Bono Award. This will be the fifth year that the Section will honor one of its members with this distinction. Prior recipients include Michael Martinez (2018), Matt Crow (2017), Jennifer Bennington (2016) and Ciara Rogers (2015).

For more information about the award, and to make a nomination, please see the official nomination form.


Message From the Chair Of the NCBA Bankruptcy Section

By John Small

Dear Members of the Bankruptcy Section:

It is my privilege to serve as chair of the Bankruptcy Section during this fiscal year. The Section leadership is looking forward to a great year. You can find the officers, council members and committee chairs for the Bankruptcy Section by going to its webpage on the NCBA website.

I am excited that there are three new committees working for the Bankruptcy Section this year.

The Networking Committee led by Cindy Oliver, Samantha Bumbaugh and Andy Houston will have more networking events outside the Annual Bankruptcy Institute and Council meetings. This committee is the result of the members’ interests indicated by the survey conducted at the end of 2018. I encourage you to look for announcements of additional networking events this year.

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