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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Campbell Law’s Bankruptcy Clinic Helps Clients In Need While Developing the Practitioners Of Tomorrow

By Ciara L. Rogers

The Stubbs Bankruptcy Clinic, a clinical program provided by Campbell University’s Norman A. Wiggins School of Law, began in the fall of 2014. The clinic was created to assist low-income individuals who would otherwise not have access to legal representation during the bankruptcy process. In the nine semesters that it has been in operation, the clinic has filed thirty-seven bankruptcy cases, including chapter 7 and 13 cases, and even a chapter 11 case. Additionally, the clinic has represented one creditor in an adversary proceeding and provided an additional twenty-five people with legal advice about the bankruptcy process and referrals to bankruptcy practitioners. In some instances, the demand for the clinic’s services exceeds its ability to provide services.

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Protecting Your Practice: Tech and Security Tips for Small and Solo Firms

By Francisco Morales and Chris Michalec

The ever-evolving world of technology and cybersecurity present a unique set of challenges to businesses of all shapes and sizes. Security breaches are so commonplace these days that it’s no longer about “if” you will be hacked, but “when.” In an address at a major information security conference in 2012, then-FBI director Robert Mueller told the crowd: “I am convinced that there are only two types of companies: those that have been hacked and those that will be. And they are even converging into one category: companies that have been hacked and will be hacked again.” Remarks by Robert S. Mueller III at RSA Cyber Security Conference, San Francisco, CA, March 1, 2012.

Law firms are often viewed as “one-stop shops” for hackers given the enormous quantity of sensitive and confidential information stored in firms’ systems. Even more concerning, in general, law firms have lagged behind in adapting to the rapid changes in technology and cybersecurity, and many law firms (big and small) have been subject to well-documented cyber attacks in the last few years. For example, in 2015, a Panamanian law firm and corporate service provider Mossack Fonseca was the subject of a high-profile cyber attack, in which 11.5 million documents were exposed by an anonymous source.

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Settling Debts: A Cautionary Tale

By William E. Brewer Jr.

He Began to Cry

My dental hygienist recently brought her father to consult with me to discuss filing bankruptcy. We will call him Steve. Steve had approximately $75,000.00 of credit card debt. He had retired from the State of North Carolina, at age 58, after working as a school teacher for thirty years. He had health issues that prevented him from working more than a part-time job. His wife did not work due to health reasons and had no income. He was supporting himself and his wife on his $3,500.00 State pension and $750.00 of take-home pay from his part-time job. He had accumulated $50,000.00 in the State’s optional 401-K plan. He and his wife had $50,000.00 equity in their jointly-owned residence.

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Civil Contempt in Bankruptcy: Exploring the Limits of the Bankruptcy Courts’ Subject Matter Jurisdiction

By Landon G. Van Winkle

Introduction

Many of us are familiar with the famous, albeit purportedly apocryphal, quote by former president Andrew Jackson, who, upon hearing of the Court’s decision in Worcester v. Georgia, 31 U.S. 515 (1832), is supposed to have famously declared of Chief Justice John Marshall: “John Marshall has made his decision; now let him enforce it!” See, e.g., Edwin A. Miles, After John Marshall’s Decision: Worcester v. Georgia and the Nullification Crisis, 39 J. Southern Hist. 519, 519 (1973). But See Paul F. Boller, Jr. & John George, They Never Said It: A Book of Fake Quotes, Misquotes, & Misleading Attributions 53 (1989).

Regardless of whether these words were ever uttered, the sentiment is clear: absent cooperation from the coordinate branches of the federal government, even the U.S. Supreme Court would be forced to rely on its contempt powers to enforce its rulings. What is perhaps less well-known about Andrew Jackson is that he was, at one time, on the receiving end of a federal court’s civil contempt power, a mark on his record he regretted until his dying days. Eberhard P. Deutsch, The United States Versus Major General Andrew Jackson, 46 A.B.A. J. 966, 971–72 (1960).

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