October 2008

Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give your coat to your creditors”
-– Joey Adams  (1911-1999)--

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September 2008

Bankruptcy Law Resource Center Released by Lawyer Central

TransWorldNews

9-15-08 -- Lawyer Central is pleased to announce the release of its newly updated Bankruptcy Law Resource Center, which provides free informational legal resources for individuals and business that are considering the option of filing for bankruptcy. The Bankruptcy Resource Center provides a means for concerned parties to explore their options while gaining an understanding of the legal issues surrounding bankruptcy and foreclosure. . . . An overview of Chapter 7 bankruptcy, Chapter 11 bankruptcy, Chapter 12 bankruptcy, and Chapter 13 bankruptcy, and answers to frequently asked questions about commercial bankruptcy and consumer bankruptcy, an explanation of what happens to an individual’s home and property in the case of consumer bankruptcy, and a guide to understanding the New Bankruptcy Law are among Lawyer Central’s featured bankruptcy resources. The Bankruptcy Resource Center foreclosure page features a brief introduction to foreclosure, frequently asked questions about foreclosure, and a link to tips on how to avoid a foreclosure from the U.S. Department of Housing and Urban Development. A national bankruptcy news center features up-to-date news stories about commercial bankruptcy, consumer bankruptcy, and foreclosure from around the country. . . . To learn more about bankruptcy law and view Lawyer Central’s bankruptcy law resources, visit http://bankruptcy.lawyercentral.com/.

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Know-it-all bankruptcy judge tough on attorneys, law firms

Jane Ann Morrison Las Vegas Review-Journal

9-15-08 -- U.S. Bankruptcy Judge Bruce Markell is a tough hombre with demanding standards. . . . He expects attorneys who practice before him to be ethical and competent. And he's using the persuasive power of the pen to get that message out. . . . Instead of just slapping a few hands in court, Markell authored three take-no-prisoners published opinions reprimanding attorneys and even sanctioning a bank.

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TEXAS  

Winstead Ordered to Disgorge up to $500,000 in
Bankruptcy Case

Mary Alice Robbins, Texas Lawyer

9-8-08 -- A 5th U.S. Circuit Court of Appeals opinion that one former bankruptcy judge calls "scary" for lawyers requires Dallas-based Winstead to disgorge up to $500,000 in attorney fees the firm received for its work on the restructuring of a restaurant chain that filed for bankruptcy. . . . In an Aug. 28 decision in Wooley v. Faulkner, a three-judge panel of the 5th Circuit concluded that the doctrine of equitable mootness did not apply to attorneys representing clients in a Chapter 11 bankruptcy. . . . R. Glen Ayers, a former judge on the U.S. Bankruptcy Court for the Western District of Texas in San Antonio, says the 5th Circuit's opinion is worrisome for debtors' counsel and other lawyers whose fees are subject to court approval in a Chapter 11 case, because it says the doctrine of equitable mootness may not protect them.

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Court Finds Violation In Bankruptcy Law

Provision That Bans Advice to Add Debt Gets Struck Down

By Brent Kendall, Wall Street Journal

9-5-08 -- A federal appeals court in St. Louis ruled Thursday that a provision of a sweeping 2005 federal bankruptcy-overhaul law violates the free-speech rights of lawyers. . . . The 8th U.S. Circuit Court of Appeals struck down a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act that barred attorneys from advising clients to take on more debt before they filed for bankruptcy protection. . . . The appeals court, in a 2-1 ruling, said the provision "prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice." . . . "There are certain situations where it would likely be in the assisted person's, and even the creditors', best interest for the assisted person to incur additional debt in contemplation of bankruptcy," the court said.

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August 2008

Bankruptcy Filings Near 1 Million in Past Year

The Associated Press, Law.com

8-27-08 -- Nearly 1 million individuals and businesses filed bankruptcy in the 12 months ended June 30, according to U.S. Court data released Wednesday. . . . . There were 967,831 bankruptcy cases filed since July 1, 2007, up 28.9 percent from the prior 12 months, when cases totaled 751,056. . . . . Nonbusiness filings made up 96.5 percent of those cases, totaling 934,009. Of those cases, which represent individuals, 592,376 were Chapter 7 filings, which involve liquidation of nonprotected assets, like family homes. The total also included 340,852 filings for Chapter 13 protection, which allows an individual to reorganize their finances and pay down their debt. An additional 780 individuals filed for Chapter 11, which is normally used for businesses but can apply to individuals who are reorganizing but have more debt than allowed under Chapter 13. . . .

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June 2008

Dress-Wearing Judge Clears Out His Office —
This Time, for Good

Posted by Dan Slater, WSJ Law Blog

6-2-08 --When U.S. Bankruptcy Court Judge Robert Somma resigned after his arrest on a drunken driving charge in February, he had some second thoughts and ultimately decided to rescind the resignation. Recently, though, he’s apparently had more second thoughts. . . . In a statement, a spokesperson for the First Circuit has announced that Judge Somma, who in February pleaded no contest to a first-degree misdemeanor charge of drunk driving while wearing a dress (though the dress part wasn’t a part of the charge; that’s still legal), will not be coming back to work. Here’s a story from the Boston Globe, and here’s past LB coverage.

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US judge in DUI case won't return to bench

Resignation delayed by his second thoughts

By Jonathan Saltzman, Globe Staff

5-31-08 -- US Bankruptcy Court Judge Robert Somma, who resigned after his arrest on a drunken driving charge in February and then tried to rescind it, will not be coming back to work, federal court officials said yesterday. . . . The US Courts for the First Circuit released a one-paragraph statement saying that the Court of Appeals and Somma "have agreed that he will not resume service on the United States Bankruptcy Court for Massachusetts but is leaving to pursue other endeavors. The court appreciates the service that Judge Somma has rendered." . . . Somma, whose arrest in Manchester, N.H., on Feb. 6 made headlines because he was wearing a dress, was originally supposed to leave by April 1. But the resignation was delayed until May 15 after he expressed second thoughts in a letter to Massachusetts Lawyers Weekly posted online April 1 and after more than 200 bankruptcy lawyers signed a letter urging the court to let him return. . . . Over the past two weeks, the circuit executive's office and Somma's lawyer have been silent about whether he was still employed as a judge. . . . Asked about the terms of the agreement disclosed by her office yesterday afternoon, Susan Goldberg, deputy circuit executive, said there was no confidentiality provision but that it was the court's practice to "not discuss what are essentially personnel matters."

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May 2008

NORTH CAROLINA

Audit: Nearly One-Third of Bankruptcy Cases Had at Least One Material Misstatement

A material misstatement indicates the audit found information that challenged the accuracy or veracity of the debtor's petition

Pamela A. MacLean, The National Law Journal

5-1-08 -- Among the 3,582 random audits of individual Chapter 7 and Chapter 13 bankruptcy cases, 30 percent had at least one material misstatement, according to the report released Wednesday by the U.S. Trustees Office. . . . The random audits, required under the 2005 bankruptcy law reforms, are part of the oversight of private trustees and enforcement of bankruptcy laws assigned to the U.S. Trustee program. . . . The federal judicial districts with the 10 or more audits had reports of material misstatements that ranged from 9 percent to 55 percent, according to the report. . . . The top districts in the country include: Oklahoma's Eastern District with 55 percent of 11 audits; Louisiana's Middle District with half its 12 audits; Western Louisiana with 45 percent of 40 audits; Western Tennessee with 41 percent of 61 audits; Northern Georgia with 41 percent of 128 audits; Arizona with 40 percent of 47 audits; Northern California with 40 percent of 55 audits and Nevada with 39 percent of 41 audits. . . . A material misstatement indicates the audit found information that challenged the accuracy or veracity of the debtor's petition or other bankruptcy documentation.

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February 2008

Judge quits after DUI bust

Fed jurist reportedly in drag when stopped

By O’Ryan Johnson

02-16-08 -- A 63-year-old Massachusetts federal bankruptcy judge has resigned a week after he was arrested for driving under the influence in New Hampshire while reportedly wearing a woman’s dress, heels and stockings, and carrying a purse. . ..  Judge Robert Somma, a Newbury resident, pleaded no contest to the drunken driving charge in New Hampshire and agreed to have his license suspended for 12 months, the Manchester Union Leader reported. . . . “He decided with the media coverage the way it had been, it was best to put this behind him,” Gary Wenta, circuit executive for Boston’s First Federal Circuit, told the Herald. . ..  Wenta said Somma worked in private practice for years in Boston before he was appointed to the bench by President Bush in December 2004. He will remain on leave until he resigns on April 1, after roughly three years on the job. . ..  “He’s a highly respected member of the bar and remains so,” Wenta said. “He was serving a 14-year appointment. This will leave him without a pension.”

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MASSACHUSETTS   

Judge OKs Gitto/Global payment

Law firm’s insurer can pay $2.1M settlement

By Martin Luttrell Telegram & Gazette Staff

02-08-08 -- A U.S. Bankruptcy Court judge allowed the insurer for the law firm of Bowditch & Dewey LLP to make a $2.1 million settlement payment to the bankruptcy estate of former Lunenburg plastics company Gitto/Global Corp. . . . Mark G. DeGiacomo, bankruptcy estate trustee for Gitto/Global, filed a motion in December for Liberty Insurance Underwriters Inc. to pay $2.1 million to the estate for “recovery of damages relating to various possible causes of action” stemming from Bowditch & Dewey’s representation of Gitto/Global prior to its filing for bankruptcy in September 2004. . . . Mr. DeGiacomo told the court yesterday that the law firm had a conflict of interest in continuing to represent the company and its principals individually after they allegedly began engaging in fraudulent activities.

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NEW YORK  

Judge Cuts Firm's Fees Over Failure to Show Ties to Client

Joel Stashenko, New York Law Journal 

02-06-08 -- Nearly $75,000 in legal fees have been blocked by a federal judge who complained that a Long Island, N.Y., law firm was "purposefully vague" in disclosing that its lead attorney in a bankruptcy case was the son-in-law of the executive of one of several unsecured creditors it was representing. . . . Had the court known in 2002 about the relationship, it might have been "reluctant" to appoint Berkman, Henoch, Peterson & Peddy of Garden City to represent a committee of creditors in the Chapter 11 case, wrote Stephen D. Gerling, chief judge of the Northern District Bankruptcy Court. . . . In a 2002 affidavit, Berkman Henoch attorney Ronald M. Terenzi stated that an unnamed partner in the firm who would be primarily responsible for representing the creditors "is related to and [sic] officer and shareholder of one of the general unsecured creditors of the Debtors." . . . In fact, Gerling wrote in In Re: Matco Electronics Group Inc., 02-bk-60835, Berkman Henoch attorney Douglas Spelfogel was the son-in-law of Joel Girsky, the chief executive officer of Jaco Electronics Inc., one of the creditors in the action. The judge said it also appears that Spelfogel's wife, Wendy, later became in-house counsel at Jaco.

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January 2008

NEW YORK  

Bankruptcy Allegations Move Forward Against N.Y. Law Firm

Beth Bar, New York Law Journal 

01-30-08 -- Stressing that the case raised "important issues concerning the integrity of the bankruptcy process," a federal bankruptcy judge in Manhattan has declined to dismiss claims by a trustee against a Westchester County, N.Y.-based law firm. . . . In In re Food Management Group (Grubin v. Rattet), 04-22880, Judge Martin Glenn ruled that allegations of fraudulent concealment, breach of fiduciary duty, negligence and fraud on the court could proceed against attorneys Robert L. Rattet and Jonathan S. Pasternak, as well as the law firm Rattet, Pasternak & Gordon Oliver. . . . The lawyers and the firm are accused of failing to disclose that an "insider" of debtor Food Management Group had violated a court order by submitting a bid in the auction of the company's assets.

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Bankrupt companies choose Del. to file

Court sees majority of large cases

By Maureen Milford, The News Journal

01-16-08 -- Delaware's Bankruptcy Court is once again the preferred emergency room for big businesses in serious financial health, particularly subprime home mortgage lenders. . . . In 2007, nearly 80 percent of major companies that sought bankruptcy protection in the federal court chose Wilmington, according to bankruptcy data compiled by Lynn LoPucki, a professor at UCLA School of Law.

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Countrywide Draws Ire of Judges

Questions About Practices Arise in Bankruptcy Cases; Possible Liabilities for BofA

By Amir Efrati & Kara Scannell

01-14-08 -- More federal bankruptcy judges are calling into question the business practices of Countrywide Financial Corp., as Bank of America Corp. prepares to buy the ailing mortgage lender. . . . According to court documents in a bankruptcy case in Houston, Countrywide didn't properly credit a borrower's payments made during bankruptcy but instead applied them to prebankruptcy debt, which isn't allowed. In the same case, involving a debtor named William Allen Parsley, Countrywide represented to the court that Mr. Parsley owed fees that turned out to be unsubstantiated and in error. These included an improper $450 fee and a $65 unsubstantiated fee.

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December 2007

Data-Loaded Court Forms Raise Privacy Issue

Judiciary not sold on proposal requiring debtors to use 'data tags'

By Marcia Coyle, The National Law Journal

12-12-07 -- The Executive Office for U.S. Trustees, which oversees the federal bankruptcy system, wants the federal judiciary to require debtors to file data-enabled bankruptcy forms. But the judiciary, not yet sold on the idea, is worried about privacy, costs and fairness. . . . "Data tags" mark each piece of data entered into individual fields in a data-enabled form. They permit the computer system to automatically extract and aggregate financial and other information from bankruptcy filings. The tags are invisible to the user. . . . Clifford White III, director of the executive office, recently told a House committee that the mandatory forms would make the U.S. Trustee Program's implementation of the new bankruptcy reform law "vastly more time and cost efficient" in several key areas, such as calculating the means test to determine eligibility for Chapter 7 relief and identifying cases for audit under statutory case selection standards.

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CALIFORNIA  

Trustee Says Pillsbury Should Return Fees

In the SonicBlue case, the bankruptcy trustee agrees that the conflicted-out firm should give back its fees, and possibly more

Niraj Chokshi, The Recorder 

12-12-07 -- Pillsbury Winthrop Shaw Pittman is one step closer to being forced to return about $4 million to a former client. . . . The Chapter 11 trustee for SonicBlue Inc. filed a statement on Tuesday supporting a November motion, filed by SonicBlue, asking Pillsbury to pay back the fees. . . . Tuesday's statement took the motion even further. In it, Trustee Dennis J. Connolly suggested that the judge hold off on setting an amount so that other issues such as interest or even potential damages could be considered.

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Hospitals Need Lawyers -- Stat!

Kellie Schmitt, The Recorder

12-10-07 -- When Culver City, Calif.'s Brotman Medical Center filed for Chapter 11 bankruptcy in late October, attorneys paid attention. . . . Its financial struggles are likely to be a harbinger of hospital woes to come as the number of uninsured patients grows and hospital revenues decrease. . . . "All of those factors are forming a real storm for hospitals," said Stephen Warren, a partner in O'Melveny & Myers' L.A. office. "And this wave is going to involve sophisticated counsel." . . . That's why O'Melveny is actively targeting hospital bankruptcies, hoping to cash in on a climate of upheaval. It hopes to compete against firms more established in the health care area. Other firms, such as Buchalter Nemer, are ramping up as a hospital crisis looming in California may mean plenty of legal work to go around. . . . "It's an area in which we're putting a heavy degree of emphasis," Warren said. "Some of the hospital bankruptcies won't be big, but the aggregate will have a significant impact." . . . It's also worthwhile on the billing-rate side, he added: "These are not discounted rates. They tend to be very high margin, since these are bet-the-hospital problems."

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November 2007

Bankruptcy Trustee Suits Cause Increasing Concern for Law Firms

Anthony Lin, New York Law Journal  

11-28-07 --In April 2003, Steven Garfinkel, the chief financial officer of DVI Inc., wrote a memo to Chief Executive Officer Michael O'Hanlon about the crushing liquidity crisis facing the health care finance company and its implications for a pending stock float. The CFO urged his boss to talk as soon as possible to the company's main outside lawyer, John Healy, a partner in the New York office of Clifford Chance. . . . "John will tell you that the plans to go ahead with the exchange offer and raise capital without solving the cash problem will represent serious securities fraud," Garfinkel wrote in the memo. "Our issues now are defrauding an FDIC-insured bank, which has federal law implications as well as serious civil liability issues. The board will become enormously exposed to the securities fraud implications. In John's own words -- 'We all go to jail' -- in my words, 'This is serious shit.'"

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NEW YORK  

Big Bad Bankruptcy Trustees Aim to Blow Some BigLaw Houses Down

New York Lawyer, By Anthony Lin, New York Law Journal

11-26-07 --In April 2003, Steven Garfinkel, the chief financial officer of DVI Inc., wrote a memo to chief executive officer Michael O'Hanlon about the crushing liquidity crisis facing the health-care finance company and its implications for a pending stock float. The CFO urged his boss to talk as soon as possible to the company's main outside lawyer, John Healy, a partner in the New York office of Clifford Chance. . . . "John will tell you that the plans to go ahead with the exchange offer and raise capital without solving the cash problem will represent serious securities fraud," Mr. Garfinkel wrote in the memo. "Our issues now are defrauding an FDIC insured bank, which has federal law implications as well as serious civil liability issues. The board will become enormously exposed to the securities fraud implications. In John's own words - 'We all go to jail' - in my words, 'This is serious shit.'" **********************Law Firms as Targets . . . While securities class actions are brought on behalf of shareholders, bankruptcy trustee suits are brought for the benefit of creditors, the biggest of which are usually banks and investment funds. These creditors have grown more aggressive about recouping losses, lawyers say, with trustees acting accordingly. . . . "In the past, there was not a strong inclination on the part of trustees to sue lawyers and accountants," said Stephen F. Caley, a bankruptcy partner at Kelley Drye & Warren. "Over time that broke down and now they go after everyone."

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Will Subprime Crisis Be Impetus for Bankruptcy Reform by Congress?

Marcia Coyle, The National Law Journal

11-16-07 -- There is always some appetite in Congress for changes to the U.S. Bankruptcy Code, say those who watch that area closely, but will the subprime mortgage crisis entice enough lawmakers to the table for action this year? . . . In the past few months, the Democratic-controlled Congress has held hearings involving the bankruptcy system on four different fronts, and some of the titles of the hearings leave little doubt about the majority party's concerns. A hearing on the second anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was entitled, "Are consumers really being protected?" And a hearing on the operation of the U.S. Trustee Program was called, "Watchdog or Attack Dog?" . . . Also, there have been two hearings on the mortgage mess and bankruptcy-related solutions, and one on medical debt and bankruptcy. . . . "Ever since BAPCPA was enacted, there have been rifle-shot efforts focused on general bankruptcy reform," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "There's a perception among some congressmen that BAPCPA prevented some people from getting access to the Bankruptcy Code."

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Bankruptcy Trustees Taking Action Against Dishonest Lenders.

By Mona Lewandoski

11-6-07 -- In this New York Times article, Gretchen Morgenson reports on the bankruptcy courts’ increasing scrutiny of mortgage terms, in particular of improper fees and mathematical errors by which lenders can skim millions from America’s homeowners. According to the article, the problem is significant enough that the Chapter 13 trustee in Pittsburgh has requested that the Bankruptcy Court sanction Countrywide, a large loan servicer, for losing or destroying homeowners’ mortgage payments. Additionally, the Department of Justice’s bankruptcy office, the Office of the United States Trustee, has announced that it plans to become involved with lenders that file false claims in bankruptcy, require unreasonable fees, or fail to recognize debtors’ right to handle the debt through bankruptcy.

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South Florida Creditor Files Request For Criminal Rico Investigation Against Federal Bankruptcy Judge Paul G. Hyman, Jr. and Three South Florida Attorneys

PRESS RELEASE 11/6/07 -- On October 30, 2007, Meryl Lanson, a creditor of Baron’s Stores, Inc. filed a request for racketeering enterprise investigation into charges that Judge Paul G. Hyman, Jr. and attorneys Marc Cooper, Ronald C. Kopplow and Sonya L. Salkin have engaged in a pattern of racketeering in violation of the Racketeer Influenced and Corrupt Organizations Act.

"What has happened to me is no different than the Mafia using extortion, the only difference is this is extortion ‘under color of official right’. When a Federal Judge obstructs justice by misrepresentation, or obstructs a criminal investigation by failing to rule in accordance with the law, or allows the wrongful taking of assets, and does it because he is able to as a Federal Judge, it is no different than the Godfather in the Mafia."

The immediate purpose of a racketeering enterprise investigation is to obtain information concerning the nature and structure of the enterprise. The view is to the long range objective of detection, prevention and prosecution of the criminal activities of the enterprise.

According to the complaint filed by Meryl Lanson, criminal acts of perjury, fraud on the court, undisclosed fee arrangements, non-disclosure of criminal activity and various bankruptcy crimes have been committed over almost a ten year period by the same parties against the same victims. Large sums of money owed to Creditors were illegally transferred to attorneys from the Debtor at the direction of Judge Paul G. Hyman, Jr.

Meryl Lanson 561-488-7678 (Fax) 561-488-2861

R. Alexander Acosta 305-961-9001 (Fax) 305-530-7679

Clifford J. White, III 202-307-1391 (Fax) 202-307-0672

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July 2007

Judge Faults 'Boilerplate' Notification of Possible End to Bankruptcy Case

Beth Bar, New York Law Journal

7-11-07 -- A bankruptcy judge's dismissal of a Long Island, N.Y., doctor's Chapter 11 petition has been vacated by a federal judge who held that the doctor had not been sufficiently warned of the consequences of failure to follow court directives. . . . After debtor Florin Munteanu filed for bankruptcy, Eastern District of New York Bankruptcy Judge Stan Bernstein issued an order advising him of the fact that he "may consider and determine any motion to ... dismiss" at a scheduled conference. . . . But Eastern District of New York Judge Arthur D. Spatt held that this "boilerplate warning" did not provide Munteanu with adequate notice that the case could be dismissed. . . . "The notice by the Bankruptcy Court that it was considering dismissing the petition for cause was not provided at a meaningful time, and did not permit the appellant a meaningful opportunity to respond," Spatt wrote in In re: Florin Munteanu, 06 CV 6108.

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MASSACHUSETTS   

Orleans lawyer to stay in jail

Cape Cod Times

7-11-07 -- A United States District Court judge yesterday abruptly dismissed a bankruptcy case filed by disbarred Orleans attorney Richard Birchall, effectively keeping him in jail. . . . Birchall, 62, earned a degree of notoriety in Western Massachusetts through his association with Suzanne D'Amour, who was tried for conspiring to kill her husband, dentist Robert D'Amour. After D'Amour was shot to death in the couple's South Hadley home in 1993, Suzanne D'Amour reaped a $3.3 million life insurance settlement. . . . Prosecutors maintained that D'Amour and Alex Rankins, a Springfield bar bouncer, were lovers who hatched the plot to kill the dentist. They were tried separately. Although Rankins was convicted of first-degree murder, D'Amour was acquitted of murder but sentenced to prison for perjury.

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FLORIDA  

Rights to OJ Simpson Book Bought by Family of Alleged Victim

New York Lawyer, By Kelli Kennedy, The Associated Press

7-5-07 -- The family of Ron Goldman has purchased the rights to O.J. Simpson's canceled book, "If I Did It," from a court-appointed bankruptcy trustee in a settlement reached Monday. . . . The book rights will be held in the name of Ron Goldman LLC, Goldman family attorney David Cook said.

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March 2007

CALIFORNIA  

Firm Faces Loss of $4 Million in Fees in Long-Running Bankruptcy

New York Lawyer, By Zusha Elinson, The Recorder

3-7-07 -- An alleged conflict of interest could cost Pillsbury Winthrop Shaw Pittman its role in a long-running bankruptcy case -- and more than $4 million in fees. . . . A San Jose, Calif., bankruptcy judge has scheduled a March 19 hearing on a motion by the U.S. Trustee's office to disqualify the firm and disgorge the fees it has racked up representing SonicBlue since the electronics maker went belly-up four years ago. . . . The motion claims that in a 2002 opinion letter, issued before the company went bankrupt, Pillsbury assured senior note holders that SonicBlue would repay a $75 million bond obligation in full. Last September, the bond holders -- three hedge funds -- threatened to sue Pillsbury unless it indemnified them.

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December 2006

Featured Article from Lawyers USA:

Bankruptcy provision violates U.S. Constitution

By Correy E. Stephenson Staff writer

12-11-06 -- Consumer bankruptcy attorneys who decried the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act have something to celebrate this holiday season.

Recently, several courts across the country have found a controversial section of the Act unconstitutional.

Section 526(a)(4) provides that "[a] debt relief agency shall not. … advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title."

Bankruptcy attorneys argued that under the Act's broad definitions, they qualified as "debt relief agencies" and were therefore unable to advise clients to incur debt prior to filing for bankruptcy - even when doing so would be entirely legal.

A U.S.district court in Texas was first to strike down Sect. 526(a)(4) in July, followed by a federal district court in Oregon in August. (Hersh v. U.S., 347 B.R. 19; Olsen v. Gonzales, No. 05-6365-HO.)

On Nov. 7, a U.S. District Court in Connecticut followed suit. (Zelotes v. Martini, No. 3:05-cv-01591-PCD.)

Zenas Zelotes, the New London, Conn. bankruptcy attorney who successfully represented himself in the most recent case, said he filed suit last October because he was offended by the new Act.

"I proceeded to violate the law liberally, freely and with impunity," Zelotes told Lawyers USA. "It was so blatantly unconstitutional that I decided not to wait until I was a criminal defendant to challenge it."

The issue raised by Sect. 526(a)(4) "goes to the heart of the attorney client relationship," said Philadelphia bankruptcy attorney Henry Sommer. "Telling an attorney that he or she can't advise clients about all of their legal options is telling us not to do exactly what we are supposed to do."

Sommer, president of the National Association of Consumer Bankruptcy Attorneys, is waiting for a different Connecticut federal district court to rule on another lawsuit, filed on behalf of all NACBA and Connecticut bar association members, challenging the constitutionality of Sect. 526(a)(4) as well as other provisions of the Act.

Howard Marc Spector, a Dallas solo attorney who represented the plaintiff in the Texas case, said that even non-bankruptcy attorneys should be concerned by the precedent the Act set.

"This issue impacts every single lawyer," he said, because Congress effectively dictated how attorneys could counsel their clients, chilling their speech and limiting the judicial system.

Charles Miller, spokesperson for the Department of Justice, declined to comment on the general issue of Sect. 526(a)(4)'s constitutionality. But he noted that the DOJ is in various stages of appeal in each case, and has already filed a motion over the latest ruling, asking the court to reconsider its decision.

'Financially prudent actions'

In the Connecticut case, Zelotes filed suit against the local U.S. trustee, challenging the constitutionality of Sect. 526(a)(4).

He argued that the provision chilled his free speech rights because he intended to advise his clients to incur additional debt prior to filing.

The government moved to dismiss the case.

But the court found that Zelotes had standing to sue based on the threat of civil penalties and the suppression of his speech.

"Rather than changing the bankruptcy system by closing the loopholes, eliminating the incentives for opportunistic action or enacting penalties for those who take on such debt prior to filing for bankruptcy, Congress enacted Sect. 526(a)(4), a prophylactic rule which prohibits attorneys from advising their clients to take on any additional debt in contemplation of bankruptcy, even when doing so would be lawful. … [T]here are instances whereby taking on more debt in contemplation of bankruptcy would not constitute abuse of the bankruptcy system. Without delving too deep into the complexities of bankruptcy law, it is clear that the prohibition in Sect. 526(a)(4), while addressing opportunistic abuses, could also ensnare lawful, financially prudent actions," the court said.

It proceeded to give examples such as refinancing a mortgage at a lower rate to reduce payments and forestall or even prevent entering bankruptcy; taking out a loan to obtain the services of a bankruptcy attorney and/or pay the filing fee in a bankruptcy case; or borrowing money from family or friends.

"By prohibiting lawyers from advising clients to take a course of action that is lawful and in the client's best financial interest, albeit a counterintuitive one, Sect. 526(a)(4) prevents lawyers from giving clients the best and most complete advice. … By prohibiting lawyers from advising clients to take lawful, prudent actions as well as abusive ones, Sect. 526(a)(4) is overbroad and restricts attorney speech beyond what is 'narrow and necessary' to further the governmental interest," the court said.

Will other courts follow?

While each of the three decisions is still being appealed, the effect of a final judgment in any of them holding the provision unconstitutional could create an odd patchwork of jurisdictions, with Sect. 526(a)(4) enforceable in some but not others.

Further, in each appeal the government has requested that if the provision is invalidated, the decision's effect should be limited to the plaintiff at issue - meaning that other bankruptcy attorneys in that jurisdiction would still be at risk.

But Spector said he doubted a court would agree to enjoin the enforcement of an unconstitutional provision against only a single plaintiff.

He noted that he was unaware of any cases where the provision has been found enforceable, and predicted that if courts continue to invalidate Sect. 526(a)(4), the likelihood of the government seeking to enforce it will decrease.

The recent decisions have highlighted some of the problems with the Act, and the Senate Judiciary Committee has scheduled a Dec. 6 hearing to discuss its impact. In light of the recent elections and the power shift in Congress, some have speculated that a repeal of certain provisions or an amended Act might be possible.

U.S. District Court for the District of Connecticut. Zelotes v. Martini, No. 3:05cv1591(PCD). Nov. 7, 2006. Lawyers USA No. 9934619.

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October 2006

U.S. Charges 78 With Bankruptcy Fraud

By Lara Jakes Jordan, Associated Press

10-19-06 -- Nine lawyers, a former police officer and an electrician who bribed a former governor are among 78 people charged with bankruptcy fraud in the past two months, the Justice Department said. . . . Eighteen of the arrests came this week, said Deputy Attorney General Paul J. McNulty, who outlined the nationwide crackdown on people trying to conceal more than $3 million in assets, dubbed "Operation Truth or Consequences." . . . "In the end, we all wind up paying for fraud, in the form of higher interest rates and fees from companies that offer credit and loans," McNulty said. . . . Bankruptcy fraud often follows false claims on mortgages, banks and the mail, McNulty said. . . . The arrests are on track to outpace last year's estimated total of 100 bankruptcy fraud cases, the FBI said.

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ILLINOIS  

Chicago lawyers charged in bankruptcy fraud probe

By Lorene Yue
10-19-06 -- (Crain’s) — Three Chicago lawyers and a disbarred one have been accused of bilking clients out of the equity in their homes and lying in court in a nationwide federal crackdown on bankruptcy fraud. . . . Norton Helton of Chicago, Edward J. Varga of Aurora and Lorie K. Westerfield of Chicago along with disbarred lawyer William Ramon Jackson of Chicago were charged in separate cases Tuesday in U.S. District Court as part of Operation Truth or Consequences. . . . They were among 11 defendants charged in Chicago. A total of 78 defendants were charged across the nation. . . . “It is important to protect the integrity of the bankruptcy system and those who use it,” David Glockner, criminal chief for the U.S. attorney’s office in Chicago, said at a news conference Wednesday.

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EXCLUSIVE: L.A. Confidential

By Jim Edwards

On Nov. 6, Tom Rubin, the former CEO of Focus Media, is scheduled to drive to downtown Los Angeles for a 1:30 p.m. appointment at the Federal Building. He will take the elevator to the seventh floor, walk down the hall to room 740, and sit in a green leather chair facing a wall of black marble at the far end. . . . A federal judge sitting in front of that wall will likely then send Rubin to prison. Prosecutors say he potentially faces spending the rest of his life there. . . . Rubin was convicted in June of defrauding Sears and Universal Studios out of as much as $35 million, all taken from the marketers' media-buying budgets in 1999 and 2000. Put simply, Rubin booked hundreds of media buys and, instead of passing on his clients' money to pay for them, he kept it. Rubin funneled the cash into his own accounts, paid off a massive tax bill and simultaneously pitted the unpaid media outlets against his furious clients. . . . The paper trail is so complicated that no exact reckoning of Rubin's scheme has ever been reached. At its peak, Focus, the media agency Rubin ran, owed $49 million in unpaid bills, according to the company's own accounts payable list. Additionally, Sears is suing its insurance company to get $20 million in compensation—the maximum payout on its policy. Either way, Focus Media ranks among the largest corruption cases in the history of American advertising.. . .So where's the money now? . . . "Most of it is gone," said Paul Stern, an assistant U.S. attorney who prosecuted the case. "Almost nothing was recovered."

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Federal Judge's E-Mail to NPR's "Morning Edition" Triggers Inquiry

New York Lawyer, By Mary Alice Robbins, Texas Lawyer

10-15-06 -- A federal bankruptcy judge caused a stir when he sent National Public Radio an e-mail denouncing recently passed federal legislation that he says deprives suspected terrorists of rights. . . . Although she has received no complaints, 5th U.S. Circuit Court of Appeals Chief Judge Edith Jones says she is looking into U.S. Bankruptcy Judge Leif Clark's comments in the e-mail message, which was read on NPR's "Morning Edition" program on Oct. 6. . . . "It is a very novel situation," Jones says. "On the federal bench, you don't have many situations where judges are commenting on public affairs like this . . . Where the line is to be drawn on that, I just don't know." . . . But a nationally recognized judicial ethics expert says Clark did not violate the Code of Judicial Conduct when he commented on the detainee bill. . . . "In my opinion, it is a tempest in a teapot," says Jeffrey Shaman, a DePaul University College of Law professor and co-author of "Judicial Conduct and Ethics."

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THIRD CIRCUIT

Judging the Judge

By Susan Smith

A decision of the Federal Circuit Court of Appeals takes the extraordinary step of issuing a mandamus order to the U.S. Court of Claims, holding that that court erred by exercising jurisdiction over the legal challenge of a bankruptcy court judge who was not reappointed to his position, and directing that court to dismiss the case. The decision also offers interesting insight into the reappointment process for federal bankruptcy judges. (In Re United States, C.A.F.C. Miscellaneous No. 806, 9/11/06). . . . David Scholl was a bankruptcy judge in the U.S. District Court for the Eastern District of Pennsylvania. When the U.S. Court of Appeals for the Third Circuit decided not to reappoint Scholl to the bankruptcy judge position, he filed suit in the U.S. Court of Claims. The government moved to dismiss for lack of jurisdiction. But the claims court denied this motion and forged ahead in handling the suit. The government then went to the federal circuit and successfully argued that the claims court did not have jurisdiction and should be ordered to dismiss the Scholl suit.

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SIXTH CIRCUIT

A motion for relief from a judgment or order under Federal Rule of Civil Procedure 60(b) cannot properly be directed toward the decisions of a federal district court that is exercising appellate review over a bankruptcy court's ruling: A unanimous three-judge panel of the U.S. Court of Appeals for the Sixth Circuit issued this opinion decided and filed October 13, 2006 in Charlotte B. Bli V. Usa Farm Service Agency et al.

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Bankruptcy Code Question Inspires Court's Homage to Dr. Seuss

John Francis Gough, The Legal Intelligencer

10-2-06 -- Every once in a great while, a bankruptcy court opinion is published that is as entertaining as it is instructive, and therefore deserves wide circulation, with little extraneous comment. Such an opinion is that by Chief Judge Emeritus A. Jay Cristol of the United States Bankruptcy Court for the Southern District of Florida in the case of In re Hal Ray Riddle and Deloris Argelene Riddle, Chapter 7, Southern District of Florida, Miami Division, dated July 17. The opinion, in its entirety, reads as follows:

"Sua sponte order determining debtors' compliance with filing requirements of Section 521(a)(l). . . . "Pursuant to 11 U.S.C. Section 521(1), if an individual debtor in a voluntary case under Chapter 7 or 13 fails to file all of the information required under 11 U.S.C. Section 521(a)(l) within 45 days after the date of the filing of the petition, the case shall be 'automatically dismissed' effective on the 46th day after the date of the filing of the petition. . . . "The court has reviewed the docket and the papers filed by debtors in this case and believes the information required by 11 U.S.C. Section 521(a)(l), and provided by the debtors, is complete. Moreover, no party in interest has filed a request for an order of dismissal pursuant to 11 U.S.C. Section 521(i)(2). Notwithstanding, the court feels compelled to comment on the unusual and confusing language in this statutory provision.

"I do not like dismissal automatic,
It seems to me to be traumatic.
"I do not like it in this case,
I do not like it any place.
"As a judge I am most keen
to understand, What does it mean?
"How can any person know
what the docket does not show?

"What is the clue on the 46th day?
"Is the case still here, or gone away?
"And if a debtor did not do
what the Code had told him to
and no concerned party knew it,
"Still the Code says the debtor blew it.
"Well that is what it seems to say:
the debtor's case is then 'Oy vey.'

"This kind of law is symptomatic
of something very problematic.
"For if the trustee does not know
then which way should the trustee go?
"Should the trustee's view prismatic
continue to search the debtor's attic
and collect debtors' assets in his fist
for distribution in a case that stands dismissed?
"After a dismissal automatic
would this not be a bit erratic?

"The poor trustee cannot know
the docket does not dismissal show.
"What's a poor trustee to do --
except perhaps to say, 'Boo hoo!'

"And if the case goes on as normal
and debtor gets a discharge formal,
what if a year later some fanatic
claims the case was dismissed automatic?

"Was there a case, or wasn't there one?
"How do you undo what's been done?

"Debtor's property is gone as if by a thief,
and debtor is stripped but gets no relief.
"I do not like dismissal automatic.
"On this point I am emphatic!
"I do not wish to be dramatic,
but I cannot endure this static.
"Something more in 521 is needed
for dismissal automatic to be heeded.

"Dismissal automatic is not understood.
"For all concerned this is not good.
"Before this problem gets too old
it would be good if we were told:

"What does automatic dismissal mean?
"And by what means can it been seen?
"Are we only left to guess?
"Oh please Congress, fix this mess!
"Until it's fixed what should I do?
"How can I explain this mess to you?

"If the Code required an old fashioned order,
that would create a legal border,
with complying debtors' cases defended
and 521 violators' cases ended,
from the unknown status of dismissal automatic,
to the certainly of a status charismatic.
"The dismissal automatic problem would be gone,
and debtors, trustees and courts could move on.

"As to this case, how should I proceed?
"Review of the record is warranted, indeed.
"A very careful record review,
tells this court what it should do.
"Was this case dismissed automatic?
"It definitely was NOT and that's emphatic.

"Based upon the court's review, the court has determined that the debtors have complied with the information requirements of 11 U.S.C. Section 521(a)(l).

"Accordingly, it is ordered:

"1. This case is not subject to automatic dismissal under 11 U.S.C. Section 521(i)(l) or (2). . . . "2. If any party in interest has any reason to contest the Court's finding that the debtors have filed all information required by 11 U.S.C. Section 521(a)(l), that party shall file a motion for reconsideration not later than 20 days from the date of the entry of this order, and serve such motion on the trustee, the United States Trustee, debtors and debtors' counsel, if any. The motion should specifically identify the information and document(s) required by 11 U.S.C. Section 521(a)(l) that the debtors have failed to file. . . . "Nothing in this order shall excuse the debtors' duty to cooperate with the United States Trustee and the trustee assigned to this case, and shall not prevent the United States Trustee or case trustee from requesting by any authorized means, including, but not limited to motion, that the debtors supply further information." / COMMENT: It has been well said that: "To gild refined gold, to paint the lily ... is wasteful ... excess," Shakespeare, King John. So the writer will do neither.

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