California Bankruptcy Lawyer Blog

Yesterday, the Roman Catholic Diocese of San Diego filed for Chapter 11 bankruptcy protection. In its filing, the diocese claimed that it had $60.4 million in liquid assets and $95.7 million in property holdings. The move comes just hours before the first trial related to sex abuse allegations against priests in the diocese was about to begin. The diocese and the plaintiffs had been unable to reach a following two days of negotiations in Los Angeles Superior Court.

Lawyers for the plaintiffs rejected the diocese’s “final and best” settlement offer on Tuesday. An attorney for the diocese said the rejection left the diocese “with no choice.” Meanwhile, attorneys for the plaintiffs called the settlement amount insufficient. They are also accusing the diocese of filing for bankruptcy to keep potentially embarrassing details private.

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Yesterday, the Supreme Court announced that it will not take a case involving Crown Vantage Inc. and its allegations that PriceWaterhouseCoopers LLP, Merrill Lynch and Co., Inc., a Credit Suisse Group unit, as well as other individuals and companies, approved a fraudulent transaction that had been executed by James River Corp., Crown’s parent company at the time. Crown Vantage says the fraudulent transaction is what caused it to file for Chapter 11 bankruptcy protection in 2001.

James River had set up Crown as a subsidiary in the transaction, which then left Crown with hundreds of millions of dollars in underperforming assets and debts. James then spun off Crown into a separate company.

According to Crown Paper Liquidating Trust, Crown’s bankruptcy trustee, the accounting firms and investment banks made false representations when they said that Crown “would be solvent and viable” after the transaction. In making these false representations, Crown Paper Liquidating Trust says, the investment banks and accounting firms helped defraud Crown Vantage’s creditors. Crown Vantage filed for bankruptcy protection five years later.

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According to court records filed last month, one reason that the town of Moffett, Oklahoma filed for Chapter 9 bankruptcy protection was that their town’s former mayor, Billy Yandell, had acquired way too much debt for the town while in office. Yandell passed away last December from heart failure. He had served as town mayor for about a decade.

Recent reports indicate that Yandell accrued more debt than the board had been aware of and without its authority or approval. The town's debts include a number of credit purchases, including more than $4,900 in Lowe’s Commercial Services, $95, 208 for two vehicles, and over $3,200 in Dell Computers. Collection agencies are also owed money by Moffett, including $16,183.18 to AWA Collections.

An audit of the Moffett Police Department may have contributed to the town's lack of funds. It was discovered that more than half of the department's operating budget in 2003 and 2004 came from traffic tickets. The Oklahoma Department of Public Safety has indefinitely banned Moffett Police from engaging in any traffic enforcement over a four-mile strip on U.S. Highway 64.

The town filed their bankruptcy petition on December 20, 2006, and creditors are currently prevented from collecting debts owed by the town. According to court filings, Moffett has $199,396.28 in liabilities and $43,033 in assets.

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The U.S. Supreme Court says that a Massachusetts man lost his right to convert from one bankruptcy chapter to another because he did not reveal all of his assets. In a 5-4 ruling in Marrama v. Citizens Bank of America, the Court reached its decision because Robert Marrama, who runs a flooring company, did not disclose that he had placed a Maine vacation house in a trust. Marrama had listed that the value of his interest in the property was zero. A bankruptcy trustee, who found out about the home, however, wanted to recover the real estate to help pay back Marrama’s creditors. Marrama then tried to change his bankruptcy case from Chapter 7 liquidation to Chapter 13, which lets a debtor pay their debts over a period of time will keeping their property.

Justice John Paul Stevens, in writing for the majority, stated that while honest debtors were entitled to convert their Chapter 7 cases to Chapter 13, a court is entitled to take away that right because of “fraudulent conduct.” Justice Samuel A. Alito, Jr. in his dissent, however, said that the U.S. bankruptcy code was unambiguous in its provision and that the debtor possesses a “broad right” to make the conversion to Chapter 13. Previous to the Supreme Court ruling, a bankruptcy judge had denied Marrama's request to convert to Chapter 13, with a bankruptcy appellate court supporting the ruling.

Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also called liquidation bankruptcy, allows a debtor to have his or her debts become liquidated. Essentially, a bankruptcy discharge under Chapter 7 frees the debtor from being personally liable for discharged debts while preventing creditors from collecting payments or taking other action against the debtor, such as eviction, foreclosure, or shutting down utilities. A court-appointed bankruptcy trustee then liquidates certain assets owned by the debtor.

In order to qualify for personal bankruptcy under the Chapter 7 bankruptcy code, a debtor must pass the means test- meaning that their current income must be less than or equal to the median in their state. If a debtor does not pass the means test, he or she may have to file under Chapter 13 bankruptcy instead.

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The Roman Catholic Diocese of San Diego is considering filing for Chapter 11 bankruptcy, rather than going to trial regarding the 150 allegations by individuals claiming that they were sexually abused by diocese priests and church officials.

According to a letter by Bishop Robert Brom to parishioners, the bishop said that Chapter 11 could be the only option if the abuse victims could not be fairly compensated without "jeopardizing our overall mission…” he also expressed concern for the “betrayal of trust” experienced by the victims and begged for their forgiveness. He is expected to provide more extensive detail regarding his announcement later this week.

A lawyer for a number of the San Diego plaintiffs, however, says that the diocese has more than enough insurance and assets to settle the claims of clergy abuse. He also claims that the bankruptcy alternative would be one done in bad faith—not because the diocese is insolvent, but because the filing would automatically stay the upcoming trials.

The first case against the San Diego diocese that will go on trial—scheduled for the end of this month—was brought by a Colorado woman who is accusing Reverend Patrick O’Keeffe of persuading her to have sex with him at his parish office when she was just 17 in 1972. Three more trials involving multiple victims who claim that the priests who abused them were moved by diocese officials to different parishes in order to avoid the abuse incidents being exposed to the public are pending.

Continue reading "Chapter 11 Bankruptcy Protection May Be The Only Option, Says The Diocese of San Diego In California, In The Wake Of Sexual Abuse Claims Potentially Costing Over $200 Million" »

Northwest Airlines says it is on schedule to exit Chapter 11 bankruptcy protection during the second quarter of this year. The airline carrier filed its disclosure statement, as well as provided the amended details of its reorganization plan, which values the company at close to $7 billion. The plan needs to be approved by the U.S. Bankruptcy Court for the Southern District of New York, as well as by Northwest’s unsecured creditors.

Northwest is the 5th largest carrier company in the U.S. It filed for bankruptcy protection last September. A court hearing regarding its disclosure statement is scheduled for March 26.

According to Northwest’s proposed plan, holders of general unsecured claims would receive stock valued at 66% to 83% of the claims, which are estimated at anywhere from $8.75 billion to $9.5 billion. Northwest would sell new common stock worth $750 million and let unsecured creditors decide first whether they wish to buy new stock. $1.5 billion/distributions would be given to employees. Current shareholders would not receive any distribution, and current shares would be cancelled.

Chapter 11 bankruptcy
Even when a company manages to successfully exit bankruptcy, the bondholders and creditors usually become the new owners and existing equity shares are usually cancelled.

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A woman who concealed property when filing for bankruptcy has been sentenced to five months in prison. Kathy M. Bartels received her sentence last week after pleading guilty to knowing before filing for bankruptcy that she would be receiving property from her deceased father’s estate. She deposited a $20,875 distribution check into her bank account on April 28, 2003, but did not list the inheritance or trust interest when she filed her bankruptcy documents. Less than one month after depositing the check, she lied to a bankruptcy trustee while under oath, denying that she was going to receive any inheritance during the next six months. In August 2003, she received a $42,872 check—the life insurance payout from her father’s death. She deposited that money into another account.

Bartels has now admitted to withholding the information from the trustee on purpose. She says that she knew that she needed to disclose information about any inheritances she had received within the six months of filing for bankruptcy. She is being ordered to pay $40,497 in restitution and serve three years of supervised release after she serves her prison term.

The United States Department of Justice says that 10% of all bankruptcy petitions have some element of fraud. When filing for bankruptcy, all debtors are supposed to fully disclose all assets and liabilities. Unfortunately, however, not everyone does this, and the concealment of assets or lying during a bankruptcy proceeding is a cause of most bankruptcy fraud cases. When a debtor does not list all of his or her assets on a bankruptcy schedule, the crimes of false statement and concealment are committed.

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Delta Air Lines can begin soliciting votes for its creditors to approve its bankruptcy reorganization plan. The airline carrier plans to emerge from bankruptcy in April. The disclosure plan, which was approved by the judge this week, will be sent to creditors.

According to attorneys for the Atlanta-based company, all formal, informal, unfiled, and filed objections had been resolved. Among the objections, were filings from Travelocity, several banks, the city of Los Angeles, and the county and city of Denver.

Delta first filed its disclosure statement and reorganization plan last December. Since then it has made two amendments. It has also managed a takeover bid by US Airways Group, which withdrew its bid for Delta last month after Delta’s creditors announced that it would support Delta’s plan to emerge from bankruptcy as a solo company.

Creditors can vote on the reorganization plan until April 9. The plan also includes Delta’s plans to give creditors new stock upon its exit from Chapter 11.

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The bankruptcy fraud conviction of John Milwitt, a California man who pretended to be an attorney and stole money from a number of tenants who were about to be evicted, has been reversed by the Ninth U.S. Circuit Court of Appeals. According to the panel, in a 2-1 ruling, even though prosecutors proved that Milwitt deliberately tried to defraud the renters, they were unable to prove that he intentionally defrauded the landlords, which is what he is charged with in the indictment.

Milwitt published a deceptive ad in a phone book, saying that he was with a company named “AP Assistance.” The advertisement attracted the attention of a number of tenants who needed help to defend themselves from unlawful detainer actions. According to witnesses, Milwitt convinced the tenants that he was a lawyer—even though he had never gone to law school—and he told the renters that they were legally allowed to withhold their rent from the landlords. The tenants paid him fees, in exchange for him appearing in court on their behalf. Milwitt would then list them in court documents has having appeared in pro per. He did not represent any of them in court, which led to default judgments in favor of the landlords. Milwhitt had given a mailbox at a public mail service as an address, and this made it impossible for the tenants to immediately find out that he had not appeared in court for them. He filed for Chapter 13 bankruptcy protection for six of the renters—all of them claim that they did not know or even authorize the petitions, which named the six tenants’ landlords as creditors. Because of the petitions, automatic stays were immediately enacted. This prevented the landlords from collecting the rent owed to them.

Milwhitt, Under 18 U.S.C. Sec 157, was indicted on six counts of bankruptcy fraud. According to the indictment, "he fraudulently obstructed the creditors’ legal right to collect back rents, and repossess the properties” by filing the fake petitions. He was found guilty of five of those counts by a jury.

The Ninth Circuit overturned the conviction, saying that the specific intent to defraud the victim or victims—in this case, the landlords—was not identifiable.

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The Official Unsecured Creditors’ Committee for Delta Air Lines has approved the conditions of the airline carrier’s $2.5 million financing plan to emerge from Chapter 11 bankruptcy.

The announcement comes as the country’s third-largest carrier company amended and made technical changes to its bankruptcy reorganization plan and follows the withdrawal of its hostile takeover bid (at least $9.8 billion) by US Airways.

Delta’s board had considered US Airways’s proposal several times but did not take any action beyond that. US Airways withdrew its bid after the unsecured creditors rejected the merger offer in favor of supporting Delta’s reorganization plan. The Arizona-based U.S. Airways Group had given the committee until February 1 to meet certain demands, including postponing Delta’s disclosure statement hearing that was scheduled on February 7, or it would pull its offer.

Also, because several creditors had objections with its disclosure statement, Delta is working with them to resolve those differences. The airline carrier wants its reorganization plan confirmed in April.

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