On July 31, 2007, two Bear Stearn's hedge funds filed insolvency petitions in the Grand Court of the Cayman Islands. The two funds, which were limited liability companies organized and incorporated in the Cayman Islands, were the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. ("High-Grade Fund") and the Bear Sterns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. ("Enhanced Fund"). In their petitions to the court, they pled that they were insolvent and unable to pay their debts as they fell due. They requested that they be "wound up" by the court under the provisions of the Cayman Island's Companies Law. The court appointed Joint Provisional Liquidators ("JPLs") with various powers, including to take control of the funds' assets and books and records. Some commentators have expressed concern that the proceedings of the Cayman Court will prove less transparent than would a proceeding in a U.S. Court and that the Cayman Judges have a track record highly favorable to incumbent management.
The hedge funds were open-ended investment companies and intended to invest in various investments, including asset-backed securities, synthetic asset-backed securities, mortgage-backed securities, derivatives, options, swaps, and futures. Bear Stearns Asset Management, Inc. ("BSAM") was the investment manager of the funds. Following volatility in the U.S. subprime lending market in early 2007, the funds began to suffer a significant devaluation of their asset portfolios which led to margin calls from many of its trading counterparties which the funds were unable to meet. This led to default notices by these counterparties and their exercise of rights to seize and/or sell assets that were subject of repurchase agreement or over which they held security agreements. Subsequent events led to further downward pressures and deterioration.
On July 17, 2007, the funds were reported to have sent a letter to their investors advising them of the "increasingly difficult market conditions." On July 25, 2007, the JPLs of the High-Grade Fund and Enhanced Fund filed Chapter 15 petitions pursuant to section 1504 and 1515 commencing Chapter 15 cases in the U.S. Bankruptcy Court for the Southern District of New York in cases 07-12383 and 07-12384 respectively. These Chapter 15 cases were ancillary to the Cayman Island's proceedings and sought recognition of the Cayman proceedings as a "foreign main proceeding" pursuant to section 1502(4). The effect of the Chapter 15 cases will be based on whether the Cayman foreign proceedings are each determined to be a "foreign main proceeding" or a "foreign nonmain proceeding." This is based on a determination by the court whether the debtor's "center of main interests" ("COMI") is in the jurisdiction where the foreign proceeding was commenced. There is a presumption that a debtor's COMI is its place of incorporation, but this presumption can be rebutted.
Chapter 15 is the U.S. adoption of the model law on cross-border bankruptcies proposed by the United Nations Commission on International Trade Law. The law generally mandates the cooperation of the U.S. bankruptcy courts with those of foreign jurisdictions.
The funds both filed motions for a temporary restraining orders and preliminary injunctions staying execution and litigation against the funds and further sought to entrust the funds assets to the JPLs. The funds pled to the court that the relief sought would avoid piecemeal distribution of its assets and provide "breathing-room" necessary to conduct an orderly review and wind-up of the funds' affairs so that their creditors would receive equitable treatment.
Friday, August 17, 2007
Saturday, August 11, 2007
MD Fla on "Projected Disposable Income" and "Amounts Reasonably Necessary to be Expended"
The case of In re Arsenault, ___ B.R. ___, 2007 WL 1956277 (Bkrtcy.M.D.Fla.)(Williamson, J.) held that the presumptive starting point to determine a Chapter 13 debtor's "projected disposable income" under section 1325(b)(1)(B) is the number obtained from the Form B22C which makes this calculation based on the historical CMI. The court further held that this figure may be rebutted by evidence that Form B22C's "historic snapshot" does not form a reasonable basis for projected income forward over the life of the Chapter 13 plan. In applying these conclusions in Arsenault, the court found that the debtors' projected disposable income should not be determined solely by Form B22C and that the court should take into account the debtor husband's future annual bonuses that were not reflected in the Form B22C.
The court noted that in general two lines of cases dealing with this issue have emerged. One line of cases which is typified by In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) holds that disposable income is based on CMI and that disposable income is the same as projected disposable income. The determination of projected disposable income is basically a mechanical test using historical income data. The other line of cases, typified by In re Hardacre, 338 B.R. 718 (Bankr.N.D.Tex.2006) holds that the term "projected disposable income" is not the same as "disposable income" and that projected disposable income must be based on the debtor's anticipated income during the term of the plan and not be merely an average of prepetition income. The court found that Hardacre line of cases to be the better-reasoned line of cases.
The court also addressed the manner of calculation of expenses for the above-median income Chapter 13 Debtor. The court held that per section 1325(b)(3), the expenses must be determined under Form B22C without resort to Schedule J. The court noted that this section uses the term "shall" in its direction to use 707(b)(2) for expenses and it meant to take away all judicial discretion in the specific deduction areas set forth in section 707(b)(2). e.g. In re Barr, 341 B.R. 181 (Bankr.M.D.N.C.2006). The court did note though that the plan is subject to being modified under section 1329 to increase or decrease payments if circumstances change resulting in different expense calculations than those under section 707(b)(2).
The court noted that in general two lines of cases dealing with this issue have emerged. One line of cases which is typified by In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) holds that disposable income is based on CMI and that disposable income is the same as projected disposable income. The determination of projected disposable income is basically a mechanical test using historical income data. The other line of cases, typified by In re Hardacre, 338 B.R. 718 (Bankr.N.D.Tex.2006) holds that the term "projected disposable income" is not the same as "disposable income" and that projected disposable income must be based on the debtor's anticipated income during the term of the plan and not be merely an average of prepetition income. The court found that Hardacre line of cases to be the better-reasoned line of cases.
The court also addressed the manner of calculation of expenses for the above-median income Chapter 13 Debtor. The court held that per section 1325(b)(3), the expenses must be determined under Form B22C without resort to Schedule J. The court noted that this section uses the term "shall" in its direction to use 707(b)(2) for expenses and it meant to take away all judicial discretion in the specific deduction areas set forth in section 707(b)(2). e.g. In re Barr, 341 B.R. 181 (Bankr.M.D.N.C.2006). The court did note though that the plan is subject to being modified under section 1329 to increase or decrease payments if circumstances change resulting in different expense calculations than those under section 707(b)(2).
Thursday, August 9, 2007
Another SD Fla Means Test Decision Sides with Wilson and Hartwick
In a previous post on August 4, 2007, I reviewed the Benedetti decision from the Southern District of Florida which sided with the Wilson and Hartwick line of cases and held that the Debtor was entitled to deduct her obligations on a motor vehicle lease in calculating the "means test" even though she intended to surrender the vehicle and would not be making the lease payments. In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.(Cristol, J.).
On August 8, 2007, the Bankruptcy Court for the Southern District of Florida issued another case siding with this line of cases in In re Morgan, Case No. 06-11263-BKC-AJC (Bankr.S.D.Fla. August 8, 2007)(Cristol, J.). Morgan involved an over-median income debtor whose real property was not subject to a mortgage. The Debtor claimed a deduction for mortgage/rent under the Local Standards even though he did not actually have a mortgage payment. The chapter 13 Trustee argued that the Debtor was not entitled to this deduction as he did not actually have a mortgage payment. In accordance with the Wilson and Hartwick line of cases, the court agreed with the Debtor and held that the plain meaning of the phrase "applicable monthly expenses" found in section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code entitled the Debtor to deduct from CMI the Local Standard allowance without regard to whether the Debtor actually pays a housing/rental expense. The court noted the distinction in the use of the words "applicable" and "actual" as used by the Bankruptcy Code. The court found that section 707(b)(2)(A)(ii)(I) provides that a debtor's expenses "shall be" the "amounts specified" in the Local Standards and that the statute makes no provision for reducing the specified amounts to the debtor's actual expenses.
The court noted that while few courts have addressed the Local Standard deduction with regard to housing, that bankruptcy courts across the country have faced the same issue with regards to the transportation deduction under the Local Standards and noted the split in authority. The court cited with approval other housing expense cases of In re Farrar-Johnson, 353 B.R. 224 (Bankr.N.D.Ill.2006) and In re Naslund, 359 B.R. 781 (Bankr.D.Mont.2006).
On August 8, 2007, the Bankruptcy Court for the Southern District of Florida issued another case siding with this line of cases in In re Morgan, Case No. 06-11263-BKC-AJC (Bankr.S.D.Fla. August 8, 2007)(Cristol, J.). Morgan involved an over-median income debtor whose real property was not subject to a mortgage. The Debtor claimed a deduction for mortgage/rent under the Local Standards even though he did not actually have a mortgage payment. The chapter 13 Trustee argued that the Debtor was not entitled to this deduction as he did not actually have a mortgage payment. In accordance with the Wilson and Hartwick line of cases, the court agreed with the Debtor and held that the plain meaning of the phrase "applicable monthly expenses" found in section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code entitled the Debtor to deduct from CMI the Local Standard allowance without regard to whether the Debtor actually pays a housing/rental expense. The court noted the distinction in the use of the words "applicable" and "actual" as used by the Bankruptcy Code. The court found that section 707(b)(2)(A)(ii)(I) provides that a debtor's expenses "shall be" the "amounts specified" in the Local Standards and that the statute makes no provision for reducing the specified amounts to the debtor's actual expenses.
The court noted that while few courts have addressed the Local Standard deduction with regard to housing, that bankruptcy courts across the country have faced the same issue with regards to the transportation deduction under the Local Standards and noted the split in authority. The court cited with approval other housing expense cases of In re Farrar-Johnson, 353 B.R. 224 (Bankr.N.D.Ill.2006) and In re Naslund, 359 B.R. 781 (Bankr.D.Mont.2006).
Sunday, August 5, 2007
Collateral Estoppel and Piercing of the Corporate Veil in the OJ Simpson Related Bankruptcy Case
As has been reported in the national media, the OJ Simpson civil case has found its way to the Bankruptcy Court of the Southern District of Florida. The decision reported was In re Lorraine Brooke Associates, Inc., Case No. 07-12641 (Bankr.S.D.Fla. July 2, 2007)(Cristol, C.J. Emeritus). In this corporate chapter 7 case, the objection to the claim of Frederic Goldman came before the court. Goldman's secured claim in the amount of approximately $38 million dollars was based on the judgment against OJ Simpson obtained in the Los Angeles County Superior Court in 1997. The stock of the Debtor corporation was owned by Simpson's four adult children.
The evidence before the court was the May 8, 2006 contract between the Debtor and HarperCollins contract concerning the publication of the book titled "If I Did It", a letter by Simpson stating that he wrote the book, the trail of money which was paid by HarperCollins which showed that it ultimately reached Simpson or his benefit, and documents under which Simpson transferred to the Debtor his rights to the book and related intellectual property rights. Goldman previously obtained an assignment order and restraining order dated March 13, 2007 in the aforementioned California State Court. He further obtained an order declaring the Debtor corporation a surrogate of Simpson. Goldman argued to the bankruptcy court that the Debtor was barred from re-litigating the California State Court assignment and surrogate orders.
The court noted the fundamental principle that judicial proceedings of any state are entitled to the full faith and credit in every court within the United State. "The principles of full faith and credit require[s] that federal court 'must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.'" In re Bursack, 65 F.3d 51, 53 (6th Cir. 1995). The court noted that the Eleventh Circuit Court of Appeals has held that the collateral estoppel law of a state must be applied to determine the preclusive effect of a prior state court judgment. In re St. Laurent, 991 F.2d 672, 676 (11th Cir. 1993). The court found that California would give apply collateral estoppel to preclude the relitigation of the issues argued and decided in the prior assignment and surrogate orders.
Apart from the application of the doctrine of collateral estoppel, the court found that the Debtor was part of a scheme or device to hinder, delay, or defraud creditor Goldman by the use of the corporate veil. The court found the Debtor to be the nominee of Simpson. The court pierced and lifted the corporate veil from the device created for the sole purpose of secreting the possible assets from creditor Goldman. The court further found a lack of separate existence between the Debtor and Simpson and that the Debtor was incorporated without any legitimate business purpose.
The objection to the Goldman claim was overruled and the Goldman secured claim was allowed in full.
The evidence before the court was the May 8, 2006 contract between the Debtor and HarperCollins contract concerning the publication of the book titled "If I Did It", a letter by Simpson stating that he wrote the book, the trail of money which was paid by HarperCollins which showed that it ultimately reached Simpson or his benefit, and documents under which Simpson transferred to the Debtor his rights to the book and related intellectual property rights. Goldman previously obtained an assignment order and restraining order dated March 13, 2007 in the aforementioned California State Court. He further obtained an order declaring the Debtor corporation a surrogate of Simpson. Goldman argued to the bankruptcy court that the Debtor was barred from re-litigating the California State Court assignment and surrogate orders.
The court noted the fundamental principle that judicial proceedings of any state are entitled to the full faith and credit in every court within the United State. "The principles of full faith and credit require[s] that federal court 'must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.'" In re Bursack, 65 F.3d 51, 53 (6th Cir. 1995). The court noted that the Eleventh Circuit Court of Appeals has held that the collateral estoppel law of a state must be applied to determine the preclusive effect of a prior state court judgment. In re St. Laurent, 991 F.2d 672, 676 (11th Cir. 1993). The court found that California would give apply collateral estoppel to preclude the relitigation of the issues argued and decided in the prior assignment and surrogate orders.
Apart from the application of the doctrine of collateral estoppel, the court found that the Debtor was part of a scheme or device to hinder, delay, or defraud creditor Goldman by the use of the corporate veil. The court found the Debtor to be the nominee of Simpson. The court pierced and lifted the corporate veil from the device created for the sole purpose of secreting the possible assets from creditor Goldman. The court further found a lack of separate existence between the Debtor and Simpson and that the Debtor was incorporated without any legitimate business purpose.
The objection to the Goldman claim was overruled and the Goldman secured claim was allowed in full.
Saturday, August 4, 2007
Means Test Decision - SD Fla Case Sides with Wilson and Hartwick
In a previous post on April 10, 2007, I reviewed In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Bkrtcy.E.D.Wis)(Pepper J.) in which the court concluded that the debtors were entitled to deduct on their Form B22C "means test" the IRS Local Standard expense amount for vehicle ownership even though they own their vehicle outright and do not make monthly note or lease payments. The court noted that two distinct lines of decisions had emerged on this issue. One was represented by In re Hardacre, 338 B.R. 718 (N.D.Tex.2006) and In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), which held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. The opposite position was adopted in the In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006) cases which held that the debtor may deduct the vehicle ownership whether or not a debtor actually has a note or lease payment.
On July 13, 2007, apparently the first decision on this issue in the Southern District of Florida was issued in In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.)(Cristol J.). The court sided with the Wilson and Hartwick position and held that the debtor was entitled to deduct her obligations on the motor vehicle lease in calculating the "means test" even though she intended to surrender one of the vehicle and would not be making the lease payments.
The court concluded that the application of the provisions of 707(b)(2) "involves an evaluation of the Debtor's financial condition on the petition date such that a post-petition surrender of the collateral is irrelevant and inconsequential. The means test is statutorily defined as a mechanism for determining whether a presumption of abuse arises in a Chapter 7 case, with reference to expenses 'as in effect on the date of the order for relief.'"
On July 13, 2007, apparently the first decision on this issue in the Southern District of Florida was issued in In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.)(Cristol J.). The court sided with the Wilson and Hartwick position and held that the debtor was entitled to deduct her obligations on the motor vehicle lease in calculating the "means test" even though she intended to surrender one of the vehicle and would not be making the lease payments.
The court concluded that the application of the provisions of 707(b)(2) "involves an evaluation of the Debtor's financial condition on the petition date such that a post-petition surrender of the collateral is irrelevant and inconsequential. The means test is statutorily defined as a mechanism for determining whether a presumption of abuse arises in a Chapter 7 case, with reference to expenses 'as in effect on the date of the order for relief.'"
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