Saturday, May 19, 2012

New York Law Firm Likely to File Bankruptcy

       New York law Firm Dewey & LeBoeuf seems it is on the track to filing a Chapter 11 bankruptcy.  My first thought when seeing this headline was, "Why does a law firm have any debt at all in the first place?"  Answer #1: Many times as a firm grows, the next step to becoming a "big firm" is to purchase real estate and own its office rather than being a "mere tenant." The problem with this line of traditional thought is once the firm purchases real estate, it is no longer a law firm.  It is now a landlord, developer, and investor.  I understand the benefits of a firm purchasing real estate, and in many cases it is a good choice. Earn equity instead of paying rent.  The problem comes when the business uses debt to purchase the real estate.  I like to follow Dave Ramsey's advice of paying cash for everything, especially in business. 

       Answer #2: Another reason a law firm takes on debt is to fund a large case.  Many clients have great winnable lucrative cases but not the cash to fund one.  Therefore, it becomes the lawyer to fund the case and then take his fee through the winnings.  The problem here is (1) if you lose, you get lots of debt and no money to pay for it; (2) the winnings do not turn out to be that big; or (3) you win but the defendant has no assets for you to take.  If that were the case with Dewey & LeBoeuf, again what I cannot wrap my head around is why get debt? Dewey & LeBoeuf had over 300 partners and 500 employees. A firm that large should be able to handle litigation costs on a contingent fee case.  According to the following attached article, the firm had bondholders, which means the debt is more likely tied to litigation than real estate (my best guest). 

       More Dave Ramsey advice for businesses in general: if you are taking on a project, joint venture, expansion, etc., think about the risks and ask yourself, "If everything in this project were to fail would that bankrupt the business?"  If the answer is "yes", then do not take on such a project. 

For more on this likely Bankruptcy:

Monday, May 14, 2012

The Automatic Stay and Creditor Harassment on Surrendered Property

       One of the most important and influential aspects of Bankruptcy is the Automatic Stay.  The Automatic Stay is just that, automatic.  As soon as the bankruptcy petition is filed, all of a debtor’s creditors are stayed (prohibited) from making any attempts whatsoever to take any property, money, income, etc., from the debtor.  This means that all lawsuits, phone calls, repossessions, foreclosure proceedings, EVERYTHING must immediately stop otherwise the debtor can receive money damages from the creditor for a stay violation. 

        Now just focusing only on Chapter 13 cases, a creditor does have the right to ask the court for permission to be relieved from the stay (Motion for Relief from Stay), for instance, in order to repossess a car that the debtor is not paying for or is uninsured.  Furthermore, many times in a bankruptcy a debtor will voluntarily surrender a car or home to the creditor. When this happens, the creditor usually does not need permission from the court to recover the collateral, as such permission is typically included in a confirmation order.  Here is an example from an actual order:  “The plan surrenders the debtors interest in collateral to the creditors listed below. The automatic stay has been lifted to allow these creditors to repossess the collateral upon which they have liens.”  Well when the stay is lifted, does that mean the creditor can begin harassing the debtor again?  As counsel for debtors, we say no; however, there are creditors who say yes!  While in my research I have yet to find a case that addresses this particular issue, I found many cases that are analogous. 

       For example, a reaffirmation agreement is a voluntary agreement between a debtor and creditor that allows a debt to be exempt from discharge and remain in effect after the bankruptcy (This is done for debtors who wish to keep cars or houses).  It has been held by many bankruptcy courts that a creditor can contact debtors about such an agreement since both parties have this right. However, litigation soon followed because the creditor was trying to harass the debtor into such an agreement.  Courts have held that while a creditor is allowed to contact the debtor for this purpose, the creditor cannot do so through harassment, threats, or coercion, as this defeats the purpose of the Bankruptcy Code protections.

       Usually, when property is being surrendered, the discourse between the creditor and debtor is tranquil and they arrange a time for the surrendered car to be picked up or a time limit for the debtor to move out of a house.  There is currently a case going on right now where the debtors moved out of their house, which was surrendered, two years prior but are still getting harassing and threatening phone calls about transferring the property.  Though the stay had been lifted, the debtors are contending that like reaffirmation agreements, surrenders cannot be coercive.  It will be interesting to see how the case turns out.