Monthly Archives: June 2021

Most bankruptcy attorneys have a basic level of understanding of the how exemptions work. At a very broad level, a claim of exemptions removes property of a consumer debtor (note that business debtors are not afforded exemptions) from the bankruptcy estate and thereby serves as a foundation for the fresh start that bankruptcy is designed to provide.

But I suspect that even seasoned bankruptcy attorneys including myself lack a detailed understanding of many of the nuances of the mechanics of exemptions unless theyve been faced with issues related to the claiming of exemptions. A recent case has prompted a back to the basics look at the mechanics of exemptions.

When a debtor files for bankruptcy, all of the Debtors property becomes property of the bankruptcy estate pursuant to 541(a)(1) and (a)(2). The estate even includes the property that the debtor intends to claim as exempt under 522. See Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). As explained below, the debtors property may then be removed from the estate via the 522 exemption procedure.

Under 522, a Debtor may exempt property by filing a list of property that the Debtor claims is exempt under 522(b). At this time, the property is still considered property of the estate. The property may then only become exempt if the requirements of 522(l) are met. Section 522(l) states:

[t]he debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section . . . Unless a party in interest objects, the property claimed as exempt on such list is exempt.

Therefore, the propertys exempt status is conditioned on a lack of objection by a party in interest. While 522(l) conditions exemptions on a lack of objection, the section sets no deadline for when a party must object. This deadline is supplied by Fed. R. Bankr. P. 4003(b), which states in relevant part

A party in interest may file an objection to the list of property claimed as exempt only within 30 days after the meeting of creditors held under 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later.

Rule 4003(b) gives the trustee and creditors 30 days from the conclusion of the initial creditors meeting to object. By negative implication, Rule 4003 indicates that creditors may not object after 30 days unless, within such period, further time is granted by the court. Therefore, if the objection period expires without extension, then property claimed as exempt is exempt. Taylor, 503 U.S. at 642.

Once the property has been made exempt, the property exits the estate and vests in the Debtor. See In re Bell, 225 F.3d 203 (2ndCir. 2000).

The issue that brought these issues to light was a simple motion for relief from stay filed by a mortgage creditor in an individual bankruptcy case. That case had initially been filed as a chapter 11 case, but was subsequently converted to chapter 7. After conversion, the mortgage creditor filed a motion for relief from stay based on the debtors failure to make regular mortgage payments for many months, including the period during which the case was in chapter 11. As a result of ongoning settlement discussionswhich led to numerous continuancesthe motion for relief did not come to a hearing for several months. When the matter was not resolved, the parties proceeded to a hearing on the motion. After hearing the evidence and arguments, the Court determined that the motion for relief was unnecessary based on the courts reasoning that, since the creditor meeting had concluded more than 30 days prior to the hearing, the property at issuethe debtors homestead, which had been claimed as exemptwas no longer property of the estate, and therefore the stay no longer applied to such property. The court therefore held that the motion was moot.

The scenario raises a couple of issues:

Applicability of Stay to Exempted Property

The Courts ruling that the automatic stay no longer applies to exempted property is likely grounded in 11 U.S.C. 362(c)(1), which states that:

The stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;

As we saw above, once exempted, property vests in the debtor and is thereby no longer property of the estate. But is that the end of the story. Said another way, does the fact that property is no longer property of the bankruptcy estate mean that the automatic stay does not apply at all? The provision above only tells us about the stay as it relates to property of the estate. It does not explicitly address issue of the applicability of the automatic stay to property that is merely property of the debtor. A negative implication might be argued, but is that correct?

A closer look at 362(a) reveals a counter point. Section 362(a) is the broad provision that imposes the stay as to a broad range of acts against property. In most cases, the language of the various provisions of 362(a) reference property of the estate. See 11 U.S.C. 362(a)(2), (3), (4). However, 362(a)(5) states that the automatic stay operates as a stay to all entities of any act to create, perfect, or enforce against the property of the debtor. The question then becomes whether the altered language alters the analysis above. Stated simply, does the automatic stay continue to apply to property that has been exempted and thereby removed from the bankruptcy estate?

Although specific reference to 362(a)(5) has not been found in cases related to a motion for relief from stay, at least one case has addressed the issue in the context of the abandonment of property of the estate. In In re Gasprom, 500 B.R. 598 (9th Cir. 2013), a Bankruptcy Appellate Panel of the Ninth Circuit addressed the effect of an abandonment order on the existence of the automatic stay. It found the following:

By operation of law, the August 1, 2012 Abandonment Order only terminated one aspect of the stay, the aspect protecting the Gas Station as property of the estate. Upon abandonment, the Gas Station no longer was property of the estate; title to the Gas Station reverted to Gasprom. See Catalano v. Commr, 279 F.3d 682, 685 (9th Cir.2002). Hence, the aspect of the stay protecting estate property no longerapplied. See 362(c) (1). But the abandonment did not by operation of law terminate the aspect of the stay arising from 362(a)(5), which protects property of the debtor. Absent a ruling by the court granting relief from stay under 362(d) so as to permit foreclosure to occur, 362(a)(5) continued to protect the Gas Station from foreclosure, at least until the bankruptcy court closed Gasproms bankruptcy case on August 16, 2012. See 362(c)(2).

Therefore, Courts do in fact recognize the distinction in language provided by 362(a)(5) addressing property of the debtor as opposed to property of the estate. And based on the analysis in Gasprom, we believe the correct answer is that property removed from the bankruptcy estate by operation of the exemption scheme continues to be protected by the automatic stay under 362(a)(5).

Effect of Conversion

A conversion of a case e.g., from chapter 13 to 7 or from 11 to 7 adds a wrinkle to the analysis above. As noted above, Fed. R. Bankr. P. 4003(b) provides that parties in interest have 30 days from the date of the meeting of creditors held under 341(a). The question arises which meeting of creditors? If the case initiated as one under either chapter 13 or chapter 11, then a meeting of creditors was conducted in conjunction with those initial filings. By operation of 348 of the Bankruptcy Code, conversion from one chapter to another constitutes an order for relief, which triggers a new meeting of creditors under 341.

In a case out of the Second Circuit, In re Bell, 225 F.3d 203 (2nd Cir. 2000), the Court found that, when property had been exempted by an individual in their chapter 11 caseand thereby removed from the estatea subsequent conversion to chapter 7 did not bring that property back into the estate such that parties in interest could contest a claim of exemption.

However, in 2010, Bankruptcy Rule 1019 was amended and now provides in relevant part:

A new time period for filing an objection to a claim of exemptions shall commence under Rule 4003(b) after conversion of a case to chapter 7 unless:

(i) The case was converted to chapter 7 more than one year after the entry of the first order confirming a plan under Chapter 11, 12, or 13; or

(ii) The case was previously pending in chapter 7 and the time to object to a claimed exemption had expired in the original chapter 7 case.

Although not reflected in Bankruptcy Rule 4003 itself, this change implicitly overrules the result in Bell. Therefore, although property may have been previously exempted by way of a lack of objection to exemptions, the amended rule essentially allows parties in interest a second bite at the apple to object to the debtors claimed exemptions when a case originally filed under another chapter of bankruptcy is converted to Chapter 7.

Application

An individual debtors claim of exemptions is subject to a variety of rules that govern both the timing of their claim as well as the timing of objection to such claim. The automatic stay as applied to property exempted, and thereby removed from the bankruptcy case, does not automatically vanish upon exemption of such property. Creditors should be aware of the ongoing protection provided to property of the debtor, as should Debtors seeking to continue to protect such property. Finally, debtors and creditors alike should be aware of the opportunity to revisit a claim of exemptions upon a conversion of a case to Chapter 7.

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Bankruptcy: The Mechanics of Exemptions and Related Issues - JD Supra

The Boy Scouts of America said Friday its hoping to reach a settlement this summer with lawyers representing the bulk of the 84,000 sexual abuse victims who stepped forward to file claims against the organization.

Overnight, the Boy Scouts filed a new proposal with the bankruptcy court in Wilmington, Delaware.

Under the proposal, the Boy Scouts would pay $250 million in cash, property, and other assets to fund a trust for survivors, while local councils would contribute at least $500 million to the trust, with at least $300 million of that in cash.

Both the national organization and the local councils, which are not themselves in bankruptcy, would also contribute their insurance rights to the trust.

In return, the local councils would be protected from any other allegations, the Boy Scouts said in a statement.

A spokesperson for the Boy Scouts told The Post that it hopes the deal will be confirmed this summer and clear the 111-year-old organization to emerge from bankruptcy this fall.

But any proposed settlement is subject to a vote by survivors and requires approval by the bankruptcy court to take effect.

The spokesperson for the Boy Scouts said the latest proposal is the result of intensive mediation with all stakeholders involved in our Chapter 11 case, including the Coalition of Abused Scouts for Justice, which represents a large majority of claimants and other groups.

Lawyers who represent the Coalition of Abused Scouts for Justice declined to comment. And representatives for another group of victims, the Tort Claimants Committee, did not return The Posts request for comment.

The new proposal comes after the Wall Street Journal reported that the Boy Scouts and the lawyers representing most of the victims are close to agreeing to a victim compensation framework.

This amended Plan marks a significant step toward a global resolution of past abuse claims. It incorporates a number of updates following constructive mediation, which we believe will garner significant support for confirmation, the spokesperson for the Boy Scouts said. Importantly, the BSA is hopeful that this Plan, or one very similar to it, will have the support of a supermajority of survivors.

A deal would clear a path out of bankruptcy for the Boy Scouts, which filed for bankruptcy protection in February 2020 amid mounting legal costs from defending itself against lawsuits alleging sexual abuse of boys.

Its the largest bankruptcy case ever filed over childhood abuse, and dwarfs the number of claims made against other organizations, including the Catholic Church.

Reports of sexual misconduct by employees and volunteers have plagued the Boy Scouts for years, but it wasnt until last year that the scope of the allegations became clear in court.

After learning of allegations in Michigan, state Attorney General Dana Nessel announced the first statewide criminal investigation into the Boy Scouts earlier this month.

Even if the Boy Scouts reach a civil settlement with lawyers representing the abuse victims, the organization could face more criminal probes from other states that follow Michigans lead, some legal experts have said.

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Boy Scouts hoping to reach bankruptcy deal with sex-abuse victims this summer - New York Post

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Hertz Global Holdings shares have been rallying amid investor enthusiasm for the rental-car company ahead of its planned emergence from bankruptcy on June 30.

Investors appear to be attracted to Hertz because of strong rental-car pricing, a discounted valuation relative to rival Avis Budget Group (ticker: CAR), and expectations that the company will have greater financial and operational flexibility once it exits bankruptcy.

Hertz shares (HTZGQ) rose 23 cents, or 3%, to $7.91 on Tuesday after hitting a new 52-week high of $8.89. They traded as recently as June 4 at around $6, when Barronswrote favorably on the stock. Hertz now is valued at $1.2 billion based on 156 million shares outstanding.

The stock was up about 10% Monday. The companys reorganization plan was approved by a bankruptcy court last week.

Under that plan, creditors are being paid off in full, and shareholders are getting a package of cash, shares in the reorganized company, and stock warrants that Hertzs financial advisers estimated earlier this year was worth $7.36 a share. Based on investor enthusiasm for the company, the package could be worth considerably more than $7.36 a share.

Shareholders recently had the opportunity to participate in a rights offering to buy new stock or take warrants in the reorganized company. Nearly 90% chose warrants, which was viewed as the more attractive choice based on the projected value of the warrants.

New shares of the reorganized Hertz are expected to begin trading around June 30 with when-issued activity possible earlier. The warrants are expected to start trading around the same time as the stock.

There are expected to be about 470 million of new Hertz shares outstanding. Current stockholders and others had the right to buy stock at $10 a share. An investor group including Knighthead Capital and Certares Management has agreed to buy almost $3 billion of stock, reflecting the enthusiasm among many institutional investors for Hertz.

Based on an estimated equity value for the company of $6.5 billion, that implies a stock price for new Hertz shares of around $14. The warrants are based on a $6.5 billion valuation, meaning an estimated strike price of close to $14.

Current Hertz stockholders will get $1.53 a share in cash, 3% of the stock in the reorganized company, and warrants for 18% of the reorganized company. That may translate into roughly one tenth of a share of new stock and about two-thirds of a warrant per a current Hertz share, Barrons estimates.

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The bulk of the value in the package is in the warrants, which have an unusually long maturity of 30 years. That long maturity should make the warrants valuable and give them a high correlation, or delta, relative to the stock. A $1 change in the stock could mean a 75-cent change in the Hertz warrants, for a delta of 75%. Most warrants mature in 10 years or less.

Investors are excited about rising rental car pricing amid a scarcity of vehicles. The consumer price index report for May released last week showed that rental car prices were up 10% in the month after 14% increases in each of the previous two months. There has been anecdotal evidence of customers paying hundreds of dollars a day for rental cars amid scarcity. This summer could be a blockbuster period for the industry.

Here comes the pricing power was the title of a research note from Morgan Stanley analyst Billy Kovanis on Avis. He notes that the incremental profit on higher pricing is 90%. He lifted his cash flow estimates for Avis for 2021, 2022, and 2023.

He also said that investor money could flow into Hertz stock if it emerged from bankruptcy with a lower valuation than Avis, whose stock has more than doubled this year. Avis shares were off 85 cents on Tuesday, to $90.75. Hertz is expected to emerge from bankruptcy with little or no net debt and a stronger balance sheet than Avis, whose market value is $6.4 billion.

Avis has been the main way to play the rental-car industry. That will change with Hertzs emergence late this month. Avis, Hertz and the private Enterprise dominate the U.S. industry.

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Hertz Stock Gains as Bankruptcy Exit Nears. Here's Why. - Barron's