Rule Changes for the Central District of CA: New Signature Requirements

Effective tomorrow, the Bankruptcy Court for the Central District of California has implemented a significant change in its signature requirements for documents filed through CM/ECF.

Documents requiring the signature of a debtor or any other party (with the exception of registered CM/ECF filers) must bear a holographic signature.  And the familiar Electronic Filing Declaration will no longer be accepted.  

Legal nerds and insomniacs can click on the following links to view the changes:

A complete list of new, revised, and retired local rules and forms for the Central District of California, effective as of December 1, 2017, can be found here.  Local forms are available here.  The changes include the following:

  • LBR 1002-1(f)): deleted and superseded by new LBR 9011-1.
  • LBR 1017-2(f): amended to specify that the Court retains jurisdiction in dismissed cases to enforce issues listed in LBR 1017-2(f).
  • LBR 3015-1: the national rules addressing chapter 13 were updated, effective 12/1/17, which necessitated a comprehensive update to this LBR.  Amendments also encourage uniformity and clarity in chapter 13 practice.
  • LBR 3020-1: amended to clarify the requirement for certain language to be included in a Chapter 13 plan confirmation order and specify the effect of conversion from Chapter 11 to Chapter 7.
  • LBR 7055-1(b): amended to reflect a change in the renumbering of 50 U.S.C. Chapter 50.
  • LBR 7064-1: amended to specify that bankruptcy evictions are handled by the U.S. Marshals Service and the exact language to be included in an eviction order.
  • LBR 7067-1: amended to reflect changes in the national registry fund fee structure and add a requirement to use a local form order.
  • LBR 9011-1: new LBR specifies signature requirements for electronically filed documents.

Mette K.

On the Auction Block: Essential Living Foods, Inc.

Essential Living Foods, Inc. is on the auction block a mere three weeks after seeking bankruptcy protection on December 1, 2016. Don’t blink, or you could miss it.

The Proposed Bid Procedures

Yesterday, Essential Living filed a motion asking the court to approve bidding procedures; the hearing is scheduled for December 27th.

  • Terraholdings, LLC has made the initial “stalking horse” offer to purchase the company for $1.5 million, subject to overbidding with a proposed opening bid of $1.57 million.
  • Essential Living has asked that the Court set a hearing to approve a sale to the successful bidder on or before a lender-imposed closing deadline of January 10, 2017.
  • The sale process is being overseen by the financial advisory and investment banking firm Mirus Securities, Inc.
  • The debtor has proposed that all bid documents must be received by the company and its bankruptcy counsel, Weintraub & Selth, no later than two business days before the sale hearing.

The Company’s Operations

According to its court filings, Essential Living, a subsidiary of Beon Holdings, Inc., was incorporated in 2004 as a benefit corporation that sells sustainably sourced organic superfoods sourced from small farms around the world in locations such as Ecuador, Peru, and Indonesia. Its primary products include gogi berries, golden berries, maca, raw cocoa, smoothie blends, trail mixes, supplements and other organic superfoods and snacks. (Yum!) Customers include Costco, Whole Foods Market, and health food stores and grocery stores across the country.

56680825 - goji berry drink

Essential Living has a co-manufacturing facility in Commerce, CA, a third-party logistics warehouse in Los Angeles, and several warehouses. It has eight full-time employees handing accounting and administration, sales, warehousing and logistics, and food safety. Substantially all of the company’s assets are to be sold, including product formulas and blends, contracts and significant purchase orders, know-how, trade names, trademarks, inventory, accounts receivable, and fixed assets. In its emergency motion seeking authority to use cash collateral, the debtor valued its primary assets at roughly $1.9 million (consisting of approximately $700,000 in accounts receivable, $1.2 million in inventory, and $50,000 in cash on hand). It has projected gross sales of $700,000 and collections of $500,000 for December 2016.

Additional Information

Additional information can be obtained from Mirus Securities, Weintraub & Selth, or the Bankruptcy Court. The case is pending in the U.S. Bankruptcy Court for the Central District of California, Los Angeles Division, under Case #2:16-bk-25844-RK.

Mette H. Kurth

Tequila Shots, Default Interest, and the 9th Circuit’s Reversal of In re Entz-White

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Friday night I hosted a Día de los Muertos party.  Naturally, I invited other bankruptcy attorneys. And when you mix lawyers and tequila, things can get pretty crazy.  It wasn’t long before someone was well into an animated story about his Absolutely Worst Day Ever as a Lawyer. Now that its Monday morning and we’ve all sobered up, here’s a recap of his Very Bad Day and the surprise reversal of In re Entz-White that caused it.

Last Week, Debtors Could Avoid Accrued Post-Default Interest in the 9th Circuit by Curing an Underlying Default…

My friend (let’s call him “Roberto”) was representing a debtor that had fallen behind on its loan and was facing insurmountable default interest.  If it could avoid the default interest and other late penalties, it could otherwise cure its defaults, restore its loan to its original terms, and successfully reorganize. “No problem!” Roberto had said. And he took the case on a contingency.

Roberto was right. In re Entz-White Lumber & Supply, Inc., decided back in 1988, held that when a debtor cures a default it may avoid all consequences of the default, including higher post-default interest rates. In other words, it may both repay arrearages at the lower, pre-default interest rate and return to pre-default conditions, including pre-default interest rates, for the remainder of the loan obligation.

Mechanically, it works like this. Section 1123(a)(5)(G) of the Bankruptcy Code requires that a debtor’s plan of reorganization adequately provide for its implementation, including by “curing” any default.  The Bankruptcy Code contains a long list of definitions. Oddly, “cure,” used throughout the Bankruptcy Code, is not one of them. To fill in that gap, the Ninth Circuit adopted the Second Circuit’s definition of cure, e.g., curing a default means taking care of the triggering event, thereby nullifying all of its consequences, including default penalties such as higher interest.

Roberto had relied on Entz-White in charting a path forward for his client. The case was on the verge of confirmation, and he was on the verge of earning his contingency fee.

…. But on Friday, the 9th Circuit Issued a New Opinion Overturning Its Prior Ruling

On Friday, instead of celebrating, Roberto was shooting tequila in my living room and crying into his cerveza.

In In re New Investments, decided earlier that day, the Ninth Circuit overturned its opinion in Entz-White, holding that Bankruptcy Code Section 1123(d) voided Entz-White’s rule that a debtor who proposes to cure a default may avoid a higher, post-default interest rate in the loan agreement.  The Ninth Circuit reversed the bankruptcy court’s underlying order, which had confirmed a Chapter 11 plan based on Entz-White… and simultaneously upended my friend’s pending case as well.

Section 1123(d), which was enacted in 1994, well after Entz-White was decided, states that:

Notwithstanding subsection (a) of this section and sections 506(b), 1129(a)(7), and 1129(b) of this title, if it is proposed in a plan to cure a default the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.

Following is a brief summary of the case and the court’s rationale.

1. Evaluating Applicable (Washington State) Nonbankruptcy Law

In New Investments, the debtor had defaulted on a real estate loan, thereby triggering a default-interest provision. It then filed for bankruptcy protection to avoid foreclosure.  Its plan was to sell its property and then use the sale proceeds to payoff the loan – thus curing the default – at  the pre-default interest rate. The lender objected, pointing to its contractual rights under a promissory note that called for payment of a higher interest rate (equating to approx. $670,000) upon default. The loan agreement was governed by Washington state law. The Ninth Circuit concluded that Washington allows for a higher interest rate upon default when provided for in the loan agreement. See Wash. Rev. Code Ann. Section 61.24.090(1)(a). Thus, it held that cure, as determined under the parties’ contract and applicable state law, required payment of accrued default interest.

2. The Plain Language of Section 1123(d) Drives the Ninth Circuit’s Decision

The Ninth Circuit stated that the plain language of Section 1123(d) compelled its decision. As with all plain-language arguments, there is nothing to analyze here. You can read Section 1123(d) and decide for yourself whether you agree.

3. Surprise! The Legislative History Indicates This Result May Be Unexpected

In case you disagree with the Court’s plain reading of the statute, the Ninth Circuit also looked to the statute’s legislative history and stated it would not help New Investments. Essentially, the Ninth Circuit concluded that Congress had a very particular, and different, purpose in mind when it enacted Section 1123(d) and that it may not have anticipated all of the statute’s consequences. But that, it said, is not a good enough reason to ignore the statute’s plain meaning.

What was Congress trying to do when it enacted Section 1123(d)? The legislative history indicates Congress was primarily concerned with overruling the Supreme Court’s decision in Rake v. Wade, which had stated that, in order to cure a default, a Chapter 13 debtor would have to pay interest on his arrearages even if the underlying loan agreement did not provide for it. Congress was concerned that Rake v. Wade provided an unbargained-for windfall for creditors and enacted Section 1123(d) to “limit the secured creditor to the benefit of the initial bargain.” Congress, the Ninth Circuit acknowledged, may not have anticipated how Section 1123(d) would be interpreted in other contexts.

But the Ninth Circuit felt that its holding, if unanticipated, would not be inconsistent with Congressional intent. In holding the secured creditor to the benefit of its bargain, Congress had said that a cure pursuant to a plan should “put the debtor in the same position as if the default had never occurred.” That, it said, is consistent with holding both parties to the benefit of their bargain and with the concept of cure generally (which it conceeded Section 1123(d) did not alter or attempt to define).

The Ninth Circuit tacitly recognized that its holding will make it more difficult for some debtors to reorganize, undermining the Bankruptcy Code’s goals of offering a fresh start to honest debtors. But it felt that its decision strikes an appropriate balance between the interest of debtors and creditors.

4. The Interpretation of Cure in Section 1123 is Consistent With the Concept of Unimpairment

The Ninth Circuit also stated that its ruling in New Investments would be consistent with the concept of unimpairment under the Bankruptcy Code.  To render a creditor “unimpaired” such that it cannot object to a debtor’s plan, the debtor must cure defaults and may not “otherwise alter the legal, equitable, or contractual rights” of the creditor. One of these rights is post-default interest.

Future Default Interest Differentiated

It is worth noting that the New Investments decision focuses on the treatment of accrued, default interest when a debtor is calculating required cure amounts.  But once default interest or other penalties are paid and a default is therefore cured, the debtor can still return to pre-default conditions as to the remainder of the loan obligation.

Judge Berzon’s Dissenting Opinion

In a dissenting opinion, Judge Marsha S. Berzon wrote that neither Section 1123(d) nor any other provision of the Bankruptcy Code provides a definition of “cure” contrary to the one announced in Entz-White.

As for the majority’s conclusion that Congress displaced Entz-White when it passed Section 1123(d)? Judge Berzon argues at length that this conclusion is not supported by either the plain language of the statute or its legislative history. Instead, Judge Berzon argues that the Court should not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.

My friend Roberto would certainly agree.

Download the Case Here

Pacifica L 51, LC v. New Investments Inc. (In re New Investments, Inc.) No. 13 -36194 (9th Cir.) 2016.

 

 

 

When is a Settlement Not a Settlement? When It Is an Asset Sale.

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For business people, whether you are settling a dispute or selling an asset may seem obvious. But for lawyers, the distinction can be surprisingly tricky, and it has serious ramification for our clients.

The confusion arises because the Bankruptcy Code allows you to either sell or settle a claim that a debtor has against someone else. What happens if the trustee settles a claim against a defendant in exchange for a cash payment, and a creditor objects because it believes the claim is worth more than is being paid? What if a trustee wants to sell claims that the debtor has against third parties? Whether these transactions are treated as settlements or sales matters quite a bit.

When selling an asset under Bankruptcy Code section 363, you must demonstrate that you have maximized the asset’s value. To settle a claim, the bar is much lower. Bankruptcy Rule 9019 requires that you show that the settlement is fair and equitable, which generally means that it does not fall below the “lowest point in the range of reasonableness.” Moreover, you cannot appeal a bankruptcy sale to a good faith purchaser unless you obtain a stay. (This is meant to encourage bidding in bankruptcy sales by protecting good faith purchasers). A settlement, in contrast, can be appealed without a stay.

The Ninth Circuit Court of Appeals recently adopted the BAP’s earlier reasoning in Mickey Thompson (decided in 2003) and the reasoning of the Fifth and Third Circuits, holding that a bankruptcy court has the discretion to apply the more stringent standards and procedures for sales to a settlement agreement in order to maximize value.

In Adeli v. Barclay, the bankruptcy trustee had entered into a settlement agreement with a creditor under which the creditor would purchase the estate’s claims against it in exchange for both cash and a waiver of the creditor’s claims against the estate. The trustee filed a motion to approve the settlement under Rule 9019 and presented evidence regarding the settlement’s reasonableness. It also noticed the matter as a sale subject to overbidding under Section 363. Nobody submitted an overbid. The debtor then appealed the settlement to the district court—but without seeking a stay pending appeal. The Ninth Circuit concluded that, because the bankruptcy court determined that the creditor/buyer was a good faith purchaser of the potential claims, and the debtor did not seek a stay pending appeal, the appeal was moot under Bankruptcy Code section 363(m) and was properly dismissed.

While the Ninth Circuit’s decision adopted Mickey Thompson’s reasoning and does not appear to significantly change current practice, it does serve as a stark reminder of the very real differences between sale and settlement procedures. Meanwhile, its time for the lawyers to update their form files to replace references to Mickey Thompson with a citation to Adeli v. Barclay.

Adeli v. Barclay (In re Berkeley Delaware Court, LLC), No. 14-55854 *10 (9th Cir. August 23, 2016). Download in PDF

Mette H. Kurth