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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Chapter 11 Bankruptcy
Written by Craig D. Robins, Esq.The recent bankruptcy filing of American Airlines on November 29, 2012 got me thinking in several ways about the interplay between airlines, consumers and bankruptcy.
How does an airline seeking bankruptcy protection continue its frequent flyer programs and honor tickets? I’ll answer this question in this column.
What happens when a consumer, who has a cache of frequent flyer miles, files a consumer bankruptcy — can the consumer keep those miles? I’ll answer that question next month.
As a regular flyer on American Airlines, I get e-mails from AA almost daily. Within hours of the Chapter 11 bankruptcy filing, which AA commenced in the Southern District of New York under AA’s parent company, AMR Corporation, AA sent me an urgent e-mail assuring me that all would be OK and that it would be“business as usual” during the course of the bankruptcy.
As a regular flyer on American Airlines, I get e-mails from AA almost daily. Within hours of the Chapter 11 bankruptcy filing, which AA commenced in the Southern District of New York under AA’s parent company, AMR Corporation, AA sent me an urgent e-mail assuring me that all would be OK and that it would be“business as usual” during the course of the bankruptcy.
The e-mail stated that miles “you’ve earned are yours and will stay yours.”
AA’s spin doctors included verbiage that the bankruptcy proceeding was going to make the airline leaner and stronger, and better for its customers.
AA’s spin doctors included verbiage that the bankruptcy proceeding was going to make the airline leaner and stronger, and better for its customers.
As a bankruptcy attorney, I wondered what procedural path they would take in bankruptcy court to continue its business practices.
American Airlines Files a First-Day Application Seeking Special Bankruptcy Court Approval to Continue Certain Business Practices
On my own, I tracked down one of the first-day applications that AA filed, which sought an immediate order permitting AA to continue its customer programs and practices in the ordinary course of business and honor existing obligations to its customers.
It is standard Chapter 11 practice for debtors to bring several “first day” applications seeking various types of immediate relief. This application was necessary because technically a Chapter 11 debtor is prohibited from honoring pre-existing debts and obligations.
It is standard Chapter 11 practice for debtors to bring several “first day” applications seeking various types of immediate relief. This application was necessary because technically a Chapter 11 debtor is prohibited from honoring pre-existing debts and obligations.
The 23-page application, which was prepared by the Manhattan bankruptcy powerhouse firm of Weil, Gotshal & Manges, sought authorization pursuant to Bankruptcy Code sections 105(a) and 363(c), to continue a multitude of programs including the AAdvantage frequent flyer program, as well as seek permission to honor pre-petition tickets, refunds, access to Admirals Club lounges, gift cards, etc.
Bankruptcy Caselaw and Statutory Authority for the Application
Section 105(a) is the Bankruptcy Code’s general catch-all provision that grants bankruptcy judges broad equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
Section 105(a) is the Bankruptcy Code’s general catch-all provision that grants bankruptcy judges broad equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
The application discussed how the airline’s customers were the lifeblood of their business, which is highly competitive, and that customer satisfaction is the key to survival.
Airlines routinely offer travel to many of the same locations as their competitors. The application discussed the concept that this competition makes retaining loyal customers and attracting new customers critically important.
AA argued that the Chapter 11 filing would negatively affect customers’ attitudes unless AA was able to continue its customer practices. The airline also argued that continuation of its customer programs on an uninterrupted basis is critical to maintaining this support and loyalty.
Incidentally, AA created the first frequent flyer program in 1981, by rewarding its loyal customers with frequent flyer miles. The application stated that there were 69 million members of their AAdvantage frequent flyer program.
There is precedent for granting such relief, as Eastern Airlines requested similar relief about two decades ago when it filed for reorganization and sought authority to continue its pre-petition obligations.
It has become well-established that bankruptcy courts have the power to permit the post-petition payment of pre-petition obligations where necessary to preserve or enhance the value of a debtor’s estate for the benefit of all creditors.
This is sometimes referred to as the “doctrine of necessity.” See the Eastern Airlines case, which is: In re Ionosphere Clubs, Inc., 98 B.R. 174, 176 (Bankr. S.D.N.Y. 1989).
The airline argued that if they could not get the requested approval, the consequences would be draconian. Their customers would lose confidence, question the airline’s ability to survive, and likely take their business elsewhere. All of the loyalty and customer goodwill that AA had engendered over years would be lost.
It was therefore no surprise that the bankruptcy court granted the application, thus permitting AA to continue its customer programs on an uninterrupted basis.
Thus, the experience of flying on American will likely stay the same for the short-term, but as the airline tries to reorganize itself through bankruptcy, it will probably make significant changes down the road.
Incidentally, most financial commentators suggest that AA will successfully emerge from bankruptcy, as several of its legacy competitors have done this past decade, and that AA is in no danger of liquidation at this time.
One industry analyst quipped, “Airlines do a better job at filing bankruptcy than delivering luggage.”
I personally have a boatload of American Airlines Aadvantage miles, some of which I earned traveling to conventions and workshops of the National Association of Consumer Bankruptcy Attorneys. It is therefore a relief to know that they will be protected!
The Effect of Consumer Bankruptcy on Frequent Flyer Miles
These days, most consumers have an assortment of frequent flyer miles, whether they earn them from flying or credit card spending.
These miles can have a substantial value to the consumer as they can be used to obtain tickets worth thousands of dollars or purchase goods or store gift certificates.
What happens to these valuable miles when a consumer files for bankruptcy relief? Can they be protected? I will cover this question next month.
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About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the January 2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Yesterday I wrote Bankruptcy Season Is Approaching – Part One and discussed bankruptcy season for consumers. Today, I address the effect of the new year on businesses.
Bankruptcy Season for Businesses
Retailers also keep bankruptcy attorneys busy after the holidays. The holiday season should be a joyous time for retailers. However, when the economy is suffering, which is certainly the case now, some of those retailers who held out for the Christmas rush unfortunately will not make it without bankruptcy assistance.
Sometimes the wait-till-January tactic works if a spike in holiday sales provides sufficient cash to tend the coffers.
Harvard bankruptcy professor Lynn LoPucki studied the January bankruptcy phenomenon. From 1980 to 2008, 105 large public retailers that filed for bankruptcy with assets of more then $100 million, only seven did so in December, giving up the full benefit of a holiday cash infusion.
That was less than half the 18 that did so in January – the most popular filing month for large retailers — and slightly less than the 10 that filed in February after January clearance sales.
It’s a fact that 70 to 80 percent of retail sector bankruptcy filings traditionally take place at the end of the high selling season.
Corporate Debtor and Attorney May Be In Hot Water For Failure to File Corporate Resolution
Posted on
Written by Craig D. Robins, Esq.Every now and then I come across a situation that I just find incredible. I just met with a potential client who was being subpoenaed by the attorneys for a Long Island Chapter 7 bankruptcy trustee.
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The trustee is now going on a fishing expedition for assets involving a corporate Long Island Chapter 7 business bankruptcy filing. The trustee retained counsel to assist in this endeavor.
Apparently, the potential client and another fellow were each fifty-percent shareholders of a corporation that filed for Chapter 7 bankruptcy relief over a year and a half ago. The amazing thing was that the potential client who I met with had just found out about the bankruptcy. Consequently, we now have all sorts of sticky issues such as whether the corporate bankruptcy was filed in good faith or not.
Corporate Bankruptcy Filings Must Be Authorized
Here’s why: any time a corporation seeks bankruptcy protection, it must have authority to file the bankruptcy petition. That typically means that the corporation’s board of directors must meet, agree to permit the corporation to file for bankruptcy, and then acknowledge this authorization by preparing a corporation resolution authorizing the bankruptcy filing.
In this case, there was no corporate resolution! Local E.D.N.Y. Bankruptcy Rule 1074-1(a) states that any bankruptcy petition filed by a corporation shall be accompanied by a duly attested copy of the corporate resolution authorizing the filing. Such a document was never filed – nor could it have since it would have required the consent of both shareholders. The shareholder I met with never consented to the bankruptcy filing, let alone knew about it.
So, here is a corporate bankruptcy filing that is fatally deficient. If a corporate bankruptcy is not duly authorized, it can be dismissed.
Authority to File Corporate Bankruptcy Requires Consent by a Majority of the Board of Directors
In order for a corporation to have the appropriate authority to file bankruptcy, there must an agreement by the majority of the directors, which is necessary to constitute a quorum to transact business.
Shareholders, themselves, lack the authority necessary to file bankruptcy because they do not have the power of management. Thus, one shareholder cannot decide, on his own, that he wants to put the corporation into bankruptcy, even if that shareholder is the president, unless he has over 50% of the voting shares of stock.
What is also perplexing is that the shareholder who filed the bankruptcy failed to include his partner as an interested party, which would have enabled the partner to then receive notice of the filing.
What happens now? If this is brought to the attention of the court, the judge would have no choice but to find that the court does not have jurisdiction over the case and would be constrained to dismiss it. It also appears that the subpoena that my potential client received cannot be enforced.
In any event, this matter leaves some serious questions upon the attorney who filed the case, considering that he may have filed a frivolous case. The attorney, who holds himself out as a business lawyer, should know better.
Written by Craig D. Robins, Esq.The precipitous drop in real estate values during the past two years is forcing many wealthy homeowners to consider bankruptcy as an option and Long Island is no exception.
Here’s why: many well-to-do individuals invested heavily in one parcel of real estate — their home — during the go-go real estate boom, thinking that it was a fantastic investment. After all, who could complain about an investment that increased 10% to 20% in value for a number of years?
Recently, homes have been bad investments. The more expensive the home; the worse the investment.
However, as we all know, real estate values have plummeted. To make matters worse, many of these high-income homeowners leveraged their real estate purchase. They bought a million dollar home and financed it with a million dollar mortgage. Unlike an investment in stock, which, in a worse-case scenario, can become worthless, a leveraged investment in real estate can actually result in an extreme amount of additional liability.
Thus, if the value of the home is under water and worth less much less than the amount due on the mortgage, the homeowner can now be liable to the mortgage company for hundreds of thousands of dollars more than what the home is worth. In addition, the homeowner must also pay for property taxes, insurance and maintenance.
Individual Chapter 11 bankruptcy filings with million dollar homes have greatly increased
With many highly-paid executives being laid off, there are a lot of million dollar homeowners who can’t afford to make their mortgage payments. According to data from the National Bankruptcy Research Center, personal Chapter 11 filings, which is the type of bankruptcy wealthy individuals would file, have jumped 73 percent over last year.
In general, if secured debt is more than $1,010,650, then a homeowner is not eligible for Chapter 13 bankruptcy, and instead, must file for Chapter 11 bankruptcy, which is also the type ob bankruptcy that businesses ordinarily file. Individual consumers who have earned substantial income in the six-month period before seeking bankruptcy relief are often precluded from filing for Chapter 7 bankruptcy because of the means test.
The falling demand for million dollar homes is one cause of increased individual chapter 11 filings
It is also interesting to note that nationwide listings of homes for ,worth $1 million or more, increased 27.3 percent in July from last October, according to Zillow.com, a Web site that tracks real estate transactions. Yet, the number of nationwide homes sold with a value between $1 million to $2 million fell 23 percent in July from a year earlier, according to the Chicago-based National Association of Realtors. Furthermore, there was a 21-month supply, up from 16 months last year. That means that expensive homes are not selling, and are losing value.
In my Long Island bankruptcy practice, I frequently consult with individuals who previously earned substantial incomes, and homeowners who own expensive homes. For such clients, bankruptcy offers many possibilities and should be considered.
Written by Craig D. Robins, Esq.
Debtor goes it alone after Chapter 13 case was dismissed for jurisdictional ineligibility
Deodath Ramcharan, an individual, filed for Chapter 11 bankruptcy relief on September 8, 2009 in the Central Islip Bankruptcy Court under case number 8-09-76724. Judge Alan S. Trust is the assigned bankruptcy judge.
This is the debtor’s second bankruptcy filing this year. He filed the current Chapter 11 petition without any legal representation. The debtor lives in Wyandanch.
The debtor previously filed for Chapter 13 bankruptcy relief while represented by Long Island bankruptcy attorney, Richard F. Arturo, on April 15, 2009. At that time, the debtor owed substantial mortgage arrears on five mortgages covering four separate properties in Wyandanch and Brooklyn.
That case was dismissed on July 6, 2009 after Chapter 13 trustee Marianne DeRosa brought a motion to dismiss, citing the fact that the debtor had too much debt to be eligible for Chapter 13 relief. Apparently, the debtor’s Schedule D, which was filed with the petition, indicated that the debtor’s secured debt was $1,235,000.
In that prior case, since this debtor’s secured debt exceeded the jurisdictional limit of $1,010,650 as set forth in Bankruptcy Code § 109(e), the debtor was not eligible for relief under Chapter 13 and the Court was required to dismiss the case.
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In order to be eligible for Chapter 13 bankruptcy relief, a debtor simply cannot have secured debt greater than $1,010,650, or unsecured debt greater than $336,900. See large debt requires Chapter 11 filing. Arguably, the Chapter 13 petition should not have been filed at all because of the large amount of debt.
The debtor then filed his second case on September 8, 2009, “pro se” without retaining counsel. The petition was handwritten and lacked almost every schedule and exhibit. As of this date, the debtor has neglected to file all of the deficient schedules and exhibits, even though their due date has passed, meaning that the Court has the ability to immediately dismiss the case.
As far as I am aware, there have been exceptionally few pro se Chapter 11 cases in the Long Island Bankruptcy Court and every single one has been dismissed relatively quickly. Although I wish this debtor good luck, the complexities of Chapter 11 bankruptcy practice are extremely challenging even for bankruptcy practitioners, and virtually impossible for lay people.
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To make matters worse, if the debtor was hoping to get the benefit of the automatic bankruptcy stay, that will not happen for much longer. When a debtor files a second bankruptcy case in the same one-year period that a prior bankruptcy case was pending, the stay only lasts 30 days unless a motion is immediately brought to extend the stay. According to the court’s docket, the debtor neglected to timely bring such a motion. See Consumer Bankruptcy Debtors Face New Limitations for Repeat Filings . That means that the mortgagees will likely have the right to continue their foreclosure proceedings in just two weeks.
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Nevertheless, the Meeting of creditors will be held on October 9, 2009 at the United States Bankruptcy Court for the Eastern District of New York in Central Islip (Room 562 at 9:00 a.m.). The first Status Conference before Judge Trust has not yet been scheduled.
This post is one of a series of posts available on the Long Island Bankruptcy Blog detailing every Chapter 11 bankruptcy case filed in the Central Islip Bankruptcy Court since August 1, 2009. I will typically post a summary of each Chapter 11 case several days or weeks after it is filed as not all info is available immediately upon filing. To see a list of Chapter 11 cases profiled on this blog, click Chapter 11 Filings on Long Island or type the name of the debtor in the upper right search box.
Written by Craig D. Robins, Esq.When I started my bankruptcy blog, I thought it would be a great idea to provide a summary of each new Chapter 11 bankruptcy case filed in Central Islip Bankruptcy Court, which is part of the United States Bankruptcy Court for the Eastern District of New York. I am proud to announce that I have begun to do this.
You will now be able to find information about all Chapter 11 cases filed in the Central Islip Bankruptcy Court after August 1, 2009 by reading posts in the Long Island Bankruptcy Blog. Most information is obtained from public documents filed in the bankruptcy case.
All Chapter 11 case information posts are in the category Chapter 11 Filings on Long Island .
Several weeks after the close of each month, I will also provide a monthly index of those Chapter 11 cases filed on Long Island the previous month.
Written by Craig D. Robins, Esq.The precipitous drop in real estate values during the past two years is forcing many wealthy homeowners to consider bankruptcy as an option and Long Island is no exception.
Here’s why: many well-to-do individuals invested heavily in one parcel of real estate — their home — during the go-go real estate boom, thinking that it was a fantastic investment. After all, who could complain about an investment that increased 10% to 20% in value for a number of years?
However, as we all know, real estate values have plummeted. To make matters worse, many of these high-income homeowners leveraged their real estate purchase. They bought a million dollar home and financed it with a million dollar mortgage. Unlike an investment in stock, which, in a worse-case scenario, can become worthless, a leveraged investment in real estate can result in an extreme amount of additional liability.
Thus, if the value of the home is under water and worth less much less than the amount due on the mortgage, the homeowner can now be liable to the mortgage company for hundreds of thousands of dollars. In addition, the homeowner must also pay for property taxes, insurance and maintenance.
With many highly-paid executives being laid off, there are a lot of million dollar homeowners who can’t afford to make their mortgage payments. According to data from the National Bankruptcy Research Center, personal Chapter 11 filings, which is the type of bankruptcy a wealthy individual would file, have jumped 73 percent over last year.
In general, if secured debt is more than $1,010,650, then a homeowner is not eligible for Chapter 13 bankruptcy, and instead, must file for Chapter 11 bankruptcy, which is also the type that businesses ordinarily file. Individuals who have earned substantial income in the six-month period before seeking bankruptcy relief are also precluded from filing for Chapter 7 bankruptcy because of the means test.
It is also interesting to note that listings of homes nationwide for sale worth $1 million or more increased 27.3 percent in July from October, according to Zillow.com, a Web site that tracks real estate transactions. Yet, the number of nationwide homes sold with a value between $1 million to $2 million fell 23 percent in July from a year earlier, according to the Chicago-based National Association of Realtors. Furthermore, there was a 21-month supply, up from 16 months last year.
In my Long Island bankruptcy practice, I frequently consult with individuals who previously earned substantial incomes, and homeowners who own expensive homes.
Written by Craig D. Robins, Esq.The United States Trustee Manual has some unusual and interesting provisions buried in its many pages. One concerns bringing your own security guards to the meeting of creditors in Chapter 11 bankruptcy cases. This is somewhat unusual considering that bankruptcy proceedings tend to be non-controversial and non-violent.
Section 3-5.14 of the Manual concerns security at section 341 meetings. It provides that if the debtor believes that there may be security problems at a particular meeting, it should notify the United States Marshal’s Service in advance.
In addition, the provision further states that the debtor may hire security guards to be present at the meeting to deter potential security problems.
I can’t imagine a situation where this would be necessary, but if a Chapter 11 debtor has plenty of enemies, this provision can provide some additional protection.
Written by Craig D. Robins, Esq.Yesterday’s Businessweek Magazine contained an insightful article, “Bankruptcies: The Next Wave.”
The author analyzed the current economy and stated that even though credit markets have improved somewhat as of late, and the American economy may be on the road to recovery, that won’t prevent a new run of corporate bankruptcies in the next year.
Here’s why: too many companies loaded up with too much debt to survive the next year without defaulting on their debt obligations. As such, they will need to file for bankruptcy protection under Chapter 11.
There is still too much debt on the balance sheets of corporate America. Banks gave many loans in 2007 when the economy was still strong. However, these loans are now coming due at a time when the economy is still weak and access to additional credit is very tight.
The recent improvement in the stock market may make credit more available. However, banks will only make credit available to financially healthy companies, and not those who may need it the most.
The article concluded by saying: “The irony is that a record number of troubled firms could tumble into bankruptcy next year, at the same time that the economy and credit markets start showing major signs of improvement.”
Unfortunately, the wave of Chapter 11 bankruptcy filings will certainly hit Long Island, as it is home to a number of struggling companies, including retail and restaurants.
Written by Craig D. Robins, Esq.
Business bankruptcy filings on Long Island have increased substantially. A report in today’s Newsday highlighted the large number of new business bankruptcy filings here.
There has been a 73% increase in business bankruptcy filings on Long Island in the 12 months ending march 31, over the same period last year. The actual number of bankruptcy filings during this period was 252.
This rate is higher than the rate for the country, which was 59%.
The article quoted Irwin Kellner, the chief economist for MarketWatch.com, who said the financial industry meltdown and resulting credit crunch have exacerbated the debt problem for businesses. “Many are having difficulty maintaining or renewing their credit lines,” he said.