Even though bankruptcy touches so many areas of the law, many attorneys outside bankruptcy practice lack an adequate understanding of how it all works. Rocky Dhir brings on experts Catherine Curtis and Robert Vanhemelrijck to get an overview of what all lawyers should know about this area of legal practice. They discuss different types of bankruptcy, outline filing and court processes, and share pro tips for things to look out for when working with clients in bankruptcy proceedings.
Catherine Curtis is an Associate Attorney at Wick Phillips, where she represents clients in a broad range of insolvency and bankruptcy matters.
J. Robert Vanhemelrijck is the founding and managing partner of Vanhemelrijck Law Offices, LP in San Antonio, Texas.
Intro: Welcome to the State Bar of Texas Podcast, your monthly source for conversations and curated content to improve your law practice with your host, Rocky Dhir.
Rocky Dhir: Hi, and welcome to the State Bar of Texas Podcast. You know, I remember the good old days back when a term like Bitcoin would have meant what was left in my pocket after buying organic milk. In modern parlance, however, bitcoin is just one example of something called cryptocurrency. What is a cryptocurrency? I still don’t know honestly, and thankfully I don’t have to know for present purposes.
What I do know though is that one of the largest cryptocurrency exchanges called FTX has imploded, it’s all over the news and as a means to avoid the crypt, okay, don’t look at me like that, okay the joke was right there, it would have been negligent not to take it, okay, but in a means to avoid the crypt FTX and several of its affiliates have filed for bankruptcy.
Now I’ve been a lawyer for over 20 years and I have realized that I still don’t completely understand the ins and outs of bankruptcy, and that labyrinth known as the Federal Bankruptcy Code.
I’ve always been satisfied to leave bankruptcy to bankruptcy lawyers but this whole FTX thing got me thinking. What do muggles like me need to know about bankruptcy, and are there hidden features of the Bankruptcy Code that ordinary mortals don’t know about.
Serendipity shined upon this podcast when we were contacted by the Young Lawyers Committee of the State Bar of Texas Bankruptcy section. They want to know why we don’t talk much about bankruptcy. And I want to know why, I don’t know much about bankruptcy, and so now here we are.
To help give us an overview of bankruptcy practice and some lawyer life hacks hidden within that practice, we have two bright bankruptcy stars. Catherine Curtis has practiced bankruptcy law for the past 12 years after graduating in 2010 from Texas Wesleyan School of Law, which is now Texas A&M School of Law. She was magna cum laude on the Law Review, which deans are overqualified frankly to be talking to me, but let’s just leave that one alone.
Catherine is also a mediator working tirelessly to resolve disputes between her two children. Catherine majored in Medieval Warfare at UT Austin. So I’m thinking her dispute resolution tactics might make for a unique dinner and tournament style restaurant.
And then we have Robert Vanhemelrijck. He graduated from the Moritz College of Law at Ohio State University in 2006. In the years since Robert has handled over 5,000 Chapter 13 and Chapter 7 Bankruptcy cases in the Western District of Texas. Bankruptcy is certainly its own animal, but outside of his practice, Robert attends to a variety of other animals including a four-month-old female pit bull named Lily, his latest adoption from the Alamo City Pit Bull Rescue.
So Catherine and Robert, welcome to the podcast, great to have you.
J. Robert Vanhemelrijck: Great to be here.
Catherine Curtis: Great to be here.
Rocky Dhir: So let’s kind of start with an overview. So Catherine, maybe you can get it started, started off. What are the various forms of bankruptcy and how do they differ from each other? It’s all these chapters and I kind of know in a sense, but then I really don’t. So what are they and how do they work?
Catherine Curtis: There are different chapters of bankruptcy based on what a debtor wants to do. There are reorganization chapters of bankruptcy like Chapter 13 and Chapter 11 that allow a debtor to restructure certain debts over a period of time and continue operating and stay in control of their assets.
Then there’s Chapter 7, which is what most people think of is just straight bankruptcy in and out, for no asset cases, that can usually be four to six months. And there are Chapter 12 Bankruptcies that allow farmers and fishermen to reorganize.
Chapter 15 is for cross-border insolvency matters. So, that’s just a very high-level general overview of the different chapters. There’s a lot of nuance that can happen particularly in Chapter 11, but that’s a general overview.
Rocky Dhir: So Robert when we say reorganization, all right, so to me whenever — I remember before I became a lawyer to me bankruptcy always meant you don’t have any money left and you know you’re just — you’re saying look I’m broke. But reorganization is different, so can you explain what, and I think Catherine said that was Chapters 11 and 13 are the Reorganization Chapters, so what does that mean for somebody who is entering Bankruptcy Code as a debtor?
J. Robert Vanhemelrijck: Yeah. So the way that I break it down is this. I divide the types of bankruptcy in the two classes; you have Chapter 7 which is a liquidation bankruptcy, there are no payments inside of that bankruptcy to your creditors other than by liquidating. In my case it’s I represent consumers nonexempt assets and then I put all the other types of bankruptcies as reorganization, repayment types.
The way I break it down is if somebody is current on their house, current on their car, things that are important to them, IRS, child support, then we’re probably looking at a Chapter 7 because we just need to eliminate debt.
On the other hand, if the inverse is the case where they are behind on their house, IRS, child support, then we’re looking at, I mean my practice would be a Chapter 13 or Chapter 11, and then for companies it’s basically the same thing. If the company is better off dead not worth saving then Chapter 7, but if it’s say General Motors, then it would be Chapter 11 because it’s worth more alive.
Rocky Dhir: Offhand to the untrained eye it sounds like, oh, I could just declare bankruptcy anytime my debts are getting a little too high. What are the drawbacks to declaring bankruptcy? And I’m sure they exist but for those who aren’t aware, what would be some of those drawbacks? So Catherine, you want to kind of walk through a couple of those?
Catherine Curtis: Sure. I’m a panel trustee, so in my normal bankruptcy practice, I’m the person that gets appointed to liquidate somebody’s nonexempt assets or non-protected assets in the Chapter 7. So if you file, for example, Chapter 7 as an individual, you have to qualify based on your income, if you have mostly consumer or personal debt. You also have — filing bankruptcy can impact you know your credit worthiness and stays on your credit report for up to 10 years, creditors can take that into account when they decide whether to loan you money, and it can impact the interest rate that you get and other things.
So if you file bankruptcy, you especially as an individual, but any debtor has a responsibility to fully and accurately list all of their assets, all of their debts, list any transfers that have happened in a certain period of time prior to bankruptcy. A trustee can come in, in some cases and clawback any transfers that have been made within four-year period of time and there’s a lot to consider and there’s limits in the Bankruptcy Code on how often you can be eligible for a discharge in bankruptcy as an individual. Corporations don’t get a discharge, individuals do, it’s a general rule.
So, but you have to comply with all the requirements under the Code, file all the things you need to file, go to the meetings, file your Credit Counseling and Financial Management Course Certificates which are separate requirements, as Robert, you know, is probably very familiar with having a consumer practice.
So if you have in a Chapter 7, gotten a discharge and a case filed in the previous eight years, you’re not going to be able to get one again, within that time period in a Chapter 7 case. And there are other deadlines based on other chapters you may have filed within that time frame.
So it’s definitely not just, oh I want to go down to the courthouse and check a box and I can file bankruptcy. There’s a lot to consider and you should definitely get the advice of an experienced bankruptcy lawyer before you do that.
Rocky Dhir: Catherine, you said you’re a trustee, which I think maybe for a non-lawyer is kind of like, kind of like a referee, you’re trying to make sure that that everything is being done fairly and above board between the debtor and those, and the creditors to whom that debtor owes debts. Is that a pretty fair, is that a fair analogy in the outside world?
Catherine Curtis: I think so. Basically, my job is to take assets that are — I’m going to say non-protected, nonexempt under the law and take those assets, liquidate them for the benefit of creditors. And there is an order of priority of payment that is set out in the Bankruptcy Code, you look at Sections 507 of the Bankruptcy Code for example, that says, what are priority payments or priority classes of creditors rather and who gets paid in what order, okay.
General unsecured creditors unfortunately, are unfortunately are at the bottom of that pile. So if you’re looking at bankruptcy from the outside in on the creditor’s side, you have to know what class of creditor you are or your client is, to determine where they fit in the scheme of priority in who’s getting paid.
Rocky Dhir: Right. Now let’s — Robert, let’s walk-through the bankruptcy court process, from day one, like Catherine said, you’re not just checking a box, there’s far more to it than that. So and I know it’s different from other civil courts in a few fairly significant ways. So can you walk us through that process, if you’re a debtor and you’re looking for bankruptcy protection?
J. Robert Vanhemelrijck: Okay. So if you’re a debtor and you’re looking for bankruptcy protection, the first thing you’re going to do is determine what kind of chapter I’m going to file. And like I said, my case is Chapter 7, Chapter 13. If you’re filing a seven, is because you only need to eliminate debts. If you’re filing a Chapter 13, it’s normally because you’re going to try to buy some time to catch up house, catch up car, pay IRS, pay child support and pay what you can on your general unsecured debts credit cards and medical bills.
The Bankruptcy Code requires that you take a class, so you’re eligible to file and then we file the case electronically and about a month after the case is filed, you’ll attend the creditors meeting after COVID here they just do them over the phone and you hire a trustee like Catherine who will look at your assets and determine what’s exempt, what’s not exempt, what do you get to keep.
And then if it’s a Chapter 7, that’s pretty much it. You just wait two months after that, you got your discharge, but if it’s a Chapter 13, you have a three to five-year repayment plan, you have to get the plan confirmed. Same thing in the Chapter 11. You have a plan that proposes I’m going to pay these creditors, I’m not going to pay these, and you have to get that confirmed by the court.
Rocky Dhir: When you go in, a lot of us — a lot of us non-bankruptcy practitioners, we hear about the bankruptcy stay that often times occurs especially if parties are already in litigation. So how does the bankruptcy stay work and what’s its purpose? So I don’t know Robert you deal a lot with that or is that more of a Catherine question?
J. Robert Vanhemelrijck: Yes. The bankruptcy stay is there to, as the name says, it’s an automatic stay, so upon the filing of the bankruptcy there is the stay, there are some exceptions like if you had filed two many cases and they got dismissed, recently you will have to get a stay imposed, but normally you have an automatic stay.
So if somebody calls me up and says my house is up for foreclosure next week and I owe 30 grand, then we file the bankruptcy that stops the foreclosure. It stays all collection attempts with the exceptional like child support, ongoing child support. So that is one of the primary benefits. If you’re getting sued, if somebody has frozen, IRS has frozen your bank accounts, you need to get those things released, so you will use the automatic stay to do that.
Rocky Dhir: And how long does that stay lasts for?
J. Robert Vanhemelrijck: It’ll last for the pendency of the case, but a creditor could come into the court and say I want to lift the stay, and that’s because either they’re not getting adequate protection if there are a secured creditor or they want to liquidate an asset, which could be like litigation. So they were being — my client was being sued, they would like to go back to State Court or Federal District Court and continue the lawsuit over there and not do it in the bankruptcy court.
Rocky Dhir: Okay. I’ll be honest with you, I was expecting my eyes to glaze over when talking about bankruptcy, but you guys have made this very interesting. There is actually, a lot of moving parts to this. We are going to talk more about that when we come back from a quick word from our sponsor.
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And we’re back, and we are talking about all things bankruptcy. So Catherine, Robert, now that we’re back, one of the questions that arises and I kind of wanted to put this out there for maybe some of the law students who might be tuning in. First of all, what got you interested in bankruptcy practice? You know, you’re in law school, you’re sampling everything, there’s corporate M&As, there’s family law, there’s general litigation, there’s all that, something about bankruptcy must have stood out to the both of you that made you decide to get into it. So Catherine, let’s start with you.
Catherine Curtis: I grew up with both of my parents involved in the bankruptcy world as bankruptcy professionals. My dad was a trustee, and my mom was a consumer bankruptcy practitioner. And when I got to law school and I took the class, I really connected with it. It’s a very code-based practice. You’re always looking at the statute and the rule. So there’s always somewhere you can look that addresses what you need to do, it was like falling in love for me. I really enjoy it. I love what I do every day. As a trustee especially you know every case is different, every case is a puzzle. I get debtors from all different kinds of industries and so it really keeps my mind engaged and I learned something new every day.
Rocky Dhir: There’s a multidisciplinary aspect to it too. I mean, from everything I’ve been able to gather from my friends and colleagues who are in bankruptcy practice, you have to know a little bit about everything, you can’t just — you can’t just be focused on bankruptcy, you kind of have to know things outside of that. Would you say that’s — is that an accurate impression on my part?
Catherine Curtis: I think so, because bankruptcy with respect to particularly the automatic stay that you referenced, when a bankruptcy is filed it’s like the castle gates coming down to protect the inhabitants of the castle from the warriors on the outside, right.
It is protecting the debtor from whatever collection actions or other litigation is occurring that drove them into bankruptcy, to give them that breathing space to be able to reorganize or liquidate or do what they need to do in the bankruptcy.
So bankruptcy touches so many areas of law. You get to see employment issues, general litigation issues, lots of different kinds of issues. And so that’s what makes it really interesting, I think.
Rocky Dhir: I think it’s also interesting that you use the drawbridge and castle analogy given that you were a Medieval Warfare Major, so it’s clearly coming out. This is front of mind, I can see where this is happening and so —
Catherine Curtis: So I was a history major let me be clear, so somebody doesn’t listen to this and catch me on, but what I focused on was the medieval period and I’m particularly fascinated by medieval and ancient warfare. I found it really fascinating because those — that’s really kind of analogous to pursuing litigation if you think about it, because at that time you have to evaluate risk of campaigns and costs and coming up with treaties which for us, in the bankruptcy world and general litigation you think of a settlement, trying to put the pieces together to make a deal. And so, just so we’re clear, I was a History Major, it’s not a Medieval.
Rocky Dhir: Medieval Warfare sounds cooler though than saying just plain old history. Medieval Warfare is awesome. I mean, I think, I think it’s really fun. So, so Robert, what about you, what got you interested in bankruptcy? And I’ll tell you for me right now, after listening to you two, I want to go study medieval warfare. Robert, what made you get interested in bankruptcy?
J. Robert Vanhemelrijck: A few things. Bankruptcy allows you to do both litigation and transactional work because when I was in law school and you would go interview at a law firm, they said what do you want to do litigation or do you want to do transactional, and I would say I want to do both and they would say, well you can’t because if you’re doing transactional work, you have to be available to the client. If you’re doing litigation, you have to be secluded from all other clients so you can focus on the litigation. Similar, I had a law professor for bankruptcy at Ohio State who liked me and got me an externship with a Federal Bankruptcy Judge in Columbus, Ohio. And then from there, I went to a clerk for the largest bankruptcy practitioner, consumer practitioner in Columbus, Ohio. So then that just became my path to coming to San Antonio and opening up my own practice here.
Rocky Dhir: When I was in law school, right, one of my big fears about ever touching bankruptcy practice and I never said it out loud, but this was always something that used to be in the back of my head. If I’m a bankruptcy lawyer and if I’m representing bankruptcy debtors, how am I going to get paid, how am I going to make a living doing this? But obviously looking at the both of you, you’ve got your lights on and you guys are well-dressed and it looks like you guys are doing really well, so obviously there’s a way to get paid being a bankruptcy lawyer. Can you walk us through that? How do you all get — how do bankruptcy lawyers make sure that that they get paid while still being able to serve their clients? So Robert, let’s start with you since you’re doing consumer bankruptcy work.
J. Robert Vanhemelrijck: That’s a common question. You brought that up earlier where everybody assumes that if you’re filing bankruptcy you’re broke.
Rocky Dhir: Right.
J. Robert Vanhemelrijck: That’s not the case. I mean, you could be a really good income earner, your company could be making good money. It’s just not making enough money to pay either a particular creditor, could be the IRS, Attorney General for child support, the mortgage you get fell behind on at the pace that they want to be paid or with the interest rate.
So if I have a client that has 100,000 in credit cards and I say well we’re going to file Chapter 7 and they’re going to be eliminated, they will happily come pay me in a Chapter 7 before the case is filed. So I get paid upfront. And then if it’s a Chapter 13 and their payments are going to go from $10,000 a month to say $2,000 a month, they’ll happily pay me something up front, and I get paid out of the $2,000 a month that they are paying. So, that’s how I get paid.
Rocky Dhir: And Catherine, what’s been your experience with that? I know you’re on the trustee side and so it’s probably different for you, but how do bankruptcy lawyers typically make sure their own lights stay on through the process?
Catherine Curtis: Robert hit the nail on the head. I used to do mostly debtor work and I did consumer and business cases, so you need to evaluate the case and get, retainer get paid upfront. If it’s a reorganization like a 13 or an 11, typically there’s some provision for payment of your fees in the plan as well. In bankruptcy generally attorney’s fees for professionals that are employed by the estate need to be approved by the court.
So in Chapter 13 you know there is special, depending on what division you’re in, fixed fee agreements that are set in those divisions that the attorneys have to work with and places that they have to get paid in the plan.
And Chapter 11s and Chapter 7s, if you are a lawyer working for the debtor or the estate, you have to be employed, and you have to be have your fees approved to generally. Most Chapter 7 attorneys as Robert said you get paid upfront, and so that’s how you would be paid.
Now as a trustee, my compensation works differently. I get paid on a percentage scale and that’s set out in Section 326 of the Bankruptcy Code based on the amount that I actually disperse to creditors. Okay, so if I collect $100,000 and there’s a $100,000 of creditors against the estate, I pay those claims out in accordance with the order and priority that set out in the Bankruptcy Code, and then I get paid my sliding scale percentage under 326 based on what’s dispersed.
Rocky Dhir: Oh wow, okay.
Catherine Curtis: If I hire a lawyer in that case, so lot of lawyers will actually work for trustees and say okay, I’ll go pursue this litigation for the estate. That lawyer has to have their employment approved and any fees approved, any settlement or resolution that claim approved by the court. And then they can get paid in accordance with whatever agreement is approved by the court.
Rocky Dhir: So just to be clear on that one, what you’re talking about is where the bankruptcy estate, the debtor might have a claim that — they might have a legal claim against a third party and then you’re hiring a lawyer to go pursue that claim and see what can be collected to then add back to the bankruptcy estate?
Catherine Curtis: That’s correct. So —
Rocky Dhir: I’m correct about, that’s the first time. I’m glad this is being recorded. I’m going to — I’m going to tell my wife, look honey, I was right about something. So that, that’s how it works.
Catherine Curtis: Right. So another section of the Bankruptcy Code that is aside from — if you’re going to read no other section of the Bankruptcy Code as a non-bankruptcy lawyer, read 362 and Section 541 of the Bankruptcy Code.
Rocky Dhir: Okay.
Catherine Curtis: Because 541 defines what is property of the estate, and when a debtor files bankruptcy that includes all their assets, including as you mentioned, Rocky, intangible assets like causes of action, okay. Debtors, and Robert, I’m sure can go into this in more detail, can exempt or protect certain types of assets depending on the exemption scheme that they select, but generally causes of action would come into the estate, and I as trustee would be able to hire a professional to go pursue that, and bring those funds into the estate.
J. Robert Vanhemelrijck: And Catherine, you also have causes of action as a trustee that just can be pursued by the trustee in a Chapter 7, the clawback provisions and the fraudulent transfer preferences. In that type of litigation, you’ll normally hire another attorney to do that, correct?
Catherine Curtis: That’s correct. I have as you noted Robert, the Chapter 5 Causes of Action, so if you look at Sections like 547, 548, 549 of the Bankruptcy Code, that lays out certain, and 544 abilities for me as a trustee to clawback certain transfers that the debtor may have made in the 421 or 90-day period before the bankruptcy was filed.
And so, if you’re representing a creditor and you get a demand letter from me or one of my attorneys saying, hey, your client got this money, prior to bankruptcy filing, it’s actually a preference you need to get money back, that’s where a lot of people can come into contact with the bankruptcy system as well.
Rocky Dhir: Huh. One question that kind of pops up to this conversation is and it’s a word lawyers hate to have to really think too deeply about except for three hours out of every year, and that’s ethics, right. Because just sitting as an outsider listening to this, it sounds like the Bankruptcy Code could possibly be used in — even if it’s not unethical, maybe in an improper way where somebody might use it to try to gain some kind of leverage or advantage on their creditors just to try to maybe get more, more favorable payment terms or something like that. And so, can you talk for a minute about maybe ethical considerations that bankruptcy lawyers and non-bankruptcy lawyers need to be aware of and how clients might be abusing the bankruptcy process and how to avoid that. So Catherine, let’s maybe start with you on that one.
Catherine Curtis: So there are several provisions of the Bankruptcy Code that deal with the good faith requirement that debtors have to have when they file the case, when they file their plans and if it’s a reorganization bankruptcy, debtors have a lot of different requirements that they have to meet. Under the code you can look at Section 521 of the Code lays out all of the requirements that debtors have to meet, in terms of filing their schedules, being truthful and accurate. Debtors have to attend a 341 meeting that Robert noted, that trustees preside over.
There’s also another party that we haven’t talked about really yet in bankruptcy cases and they’re in the United States trustees’ office, and they’re an arm of the Department of Justice and they are separate and apart from a private panel trustee that may be appointed on a case. And it’s their responsibility to oversee the case, make sure the debtors are complying with their requirements under the Code. And everybody is, meaning their obligations under the Bankruptcy Code.
So debtors can face severe penalties if they don’t meet those requirements such as losing their discharge. So there are mechanisms built into the Code for dismissal, conversion to another chapter if debtors don’t meet their obligations.
Rocky Dhir: And Robert, do you have anything to add to the ethical side?
J. Robert Vanhemelrijck: Yeah. So there’s two parts of the ethical side. So when we file bankruptcy we are normally trying to renegotiate the contract that we had with the creditors.
Rocky Dhir: Sure, sure.
J. Robert Vanhemelrijck: So with the unsecured creditor, we may not be paying them anything, but that’s legal, absent fraud. So if I go borrow a bunch of money and then I know I’m going to file bankruptcy, and I file bankruptcy, well that creditor can protect themselves by filing an adversary in the bankruptcy case and saying, I don’t want my particular claim to be discharged because he committed fraud, larceny, fiduciary fraud and other types of fraud. Also, they could try to look through the debtor’s schedules and if the debtor is lying to the court because these are sworn statements, try to get the debtor’s entire discharge denied. So they don’t get to wipe out any debts.
Rocky Dhir: We could keep talking about ethics, because this sounds very interesting, but we did promise that we would talk a bit about some of the hidden tools in the Bankruptcy Code that maybe muggles like me don’t know about. So Robert, let’s start with you on this question. For folks like me that don’t touch bankruptcy a whole heck of a lot, when do you think we need to consider bringing in or may be referring a matter to a bankruptcy lawyer? When does that point happen for those of us that are on that side?
J. Robert Vanhemelrijck: Well, it would be like, say for instance, if you’re representing a client in a particular cause of action litigation and you think your client is going to either spend more money litigating than what they’re going to get, or they’re going to lose and absent some kind of fraud you may have them at that point go talk to a bankruptcy attorney and say, hey, talk to a bankruptcy attorney. I get this very commonly, cases referred to me by other attorneys and the client comes in and said, my attorney who is representing me, has been representing me for a couple years in this litigation said, it’s better for me to just go talk to bankruptcy attorney and contemplate whether I qualify to either file a Chapter 7 and eliminate this debt, because I haven’t committed any kind of fraud, there’s no allegation of fraud or pay them what I can in up to say, five year, three year, Chapter 13 and there will be light at the end of the tunnel.
Rocky Dhir: Do you think that would also be useful if you’re on a creditor side, you know, if you’ve got — so what I’m anticipating is you’ve got a creditor who doesn’t want to accept a payment term and then they’re afraid that this might go into bankruptcy, they want to know what their rights are, is that also a time when you have had folks maybe send, send the creditor to you to get some consultation on what their rights are.
J. Robert Vanhemelrijck: I normally don’t represent creditors; I will answer their questions and then I’ll refer them to friends of mine because my friends are creditors attorneys.
Rocky Dhir: Sure.
J. Robert Vanhemelrijck: And that’s one thing I like about bankruptcy because there’s no real animosity between the attorneys because we’re just dealing with banks and individuals. Two things to think about that. One thing that a lot of creditors attorneys overlook could be that if they’re not familiar with bankruptcy, is it there is a way to put somebody in bankruptcy, a Chapter 7 involuntarily.
So if they have a lot of nonexempt assets and you’re worried about them dissipating those assets you have to get another creditor to join you but usually if they’re like suppliers or something, you’ll know who those other creditors are, and you’ll put them into a bankruptcy. And I saw that in a case, I didn’t represent them, but they put the husband in bankruptcy and they had like a $1.5 million home in Austin, which is probably works a lot more now, because this is years ago, and they weren’t able to sell that homestead because the debtor hadn’t owned it for over three and a half years and therefore was only able to exempt like 160,000 of equity despite the fact that the wife didn’t file bankruptcy. So they were able to use an involuntary bankruptcy to collect money from the debtor through the bankruptcy process.
Rocky Dhir: Wow, okay. Again, that’s something I would not have thought of. So, I’m learning something. So Catherine, how about from your perspective what are — when are the times when, when non-bankruptcy lawyers should be kind of thinking about bringing the bankruptcy side in?
Catherine Curtis: I think any time you’re dealing with a bankruptcy that has been filed or a potential bankruptcy, you should talk to a bankruptcy lawyer, and I’m going to point to the couple of provisions of the Code that I think are really important.
362(k) is the provision that provides an individual that is sustains actual or other damages, from a willful violation of stay can be entitled to, to damages, is something that somebody that has a client that maybe keeps going after a debtor, they can subject themselves to that and to getting hauled in the bankruptcy court. So you need be very mindful of that. Anytime the bankruptcy is filed, there’s a stay in place and there’s mechanisms that a creditor can go through to try and lift that stay, but there’s very specific local rules on those motions, and you need to be very careful about how you proceed once a bankruptcy is filed.
So I would say that Robert brought up something really important, which are these specific provisions of 522, which lays out the exemptions. So there’s 522(q) that provides certain limits to what a debtor can exempt in equity from their residence under certain circumstances involving fraud and so, if you have a client that as a creditor or that believes that there may be some fraud or other issues going on, really take a look at those 522 exceptions that limit the amount of equity that a debtor can have in their homestead under certain circumstances.
Rocky Dhir: Yeah, because I guess the homestead rules got amended some years ago, so now, it’s not just a blanket exemption, there’s ways to limit that to some degree. Is that, am I remembering that, right?
J. Robert Vanhemelrijck: Yes. So, it limits state exemptions. For states like Texas, where a homestead is defined 10 acres in the city, a 100 acres rural, or if you’re married 200 acres rural. They amended the Bankruptcy Code back October of 2005 and they put provisions to limit that. Like if I haven’t owned a home for over three and a half years, I’m limited to an amount that set out in the Bankruptcy Code that gets adjusted every so many years for inflation. So that was the example from the housing in Austin, they hadn’t owned it for over three and a half years, so they were limited to like 160,000 versus Texas exemptions would have said, you’re limited only by acreage. So they were able to use that provision to be able to sell the homestead, the debtor’s homestead.
Rocky Dhir: This kind of brings us maybe to our final topic if you will, and that is about the ways in which the Bankruptcy Code or the bankruptcy courts can be used strategically, even in a non-bankruptcy type of scenario, even where you’ve got a potential debtor that’s not in immediate financial peril.
You know, you guys have alluded to a couple of them. One is forcing somebody into a Chapter 7, when you’re trying to protect a certain asset and make sure it doesn’t go away. So forcing somebody that’s, that’s kind of I think a nugget that a lot of us may not know exists. And so I’m glad we had that part of the conversation. Are there other sort of strategic gems?
J. Robert Vanhemelrijck: Well, I have one offhand, because I’m preparing for this, it’s Judicial Estoppel and then also standing. And that’s something that I’ve seen throughout my practice where non-bankruptcy attorneys get that one mixed up or just completely overlook it. So if you’re representing a claimant, a litigant and you’re the plaintiff’s attorney, you should always ask them, have you ever filed bankruptcy before, or if you file bankruptcy during this litigation let me know before you file, because in the bankruptcy scenario, say for instance, this person suing for asbestos poisoning and that poisoning takes years and years before it turns into, if it’s going to turn into cancer.
So this person filed bankruptcy say five years ago, a Chapter 7 and the case is done, and now they’re claiming against somebody, I guess an insurance company or in particular, Johnson & Johnson or anybody, the attorney for the other side could say, well this claim is judicially estopped because they didn’t list it in their bankruptcy, and obviously you as their lawyer would say, well, they didn’t know about it back then.
Rocky Dhir: They didn’t know, right.
J. Robert Vanhemelrijck: But like any sworn statement at deposition or anything else you have a duty to correct it. So the appropriate measure would have been to go back, reopen the bankruptcy case and get a determination for the bankruptcy court that that asset is not properly the bankruptcy estate. Because you would argue, if you’re representing the claimant, that a claim or that cause of action did not arise until my client got sick. Because if my client never gotten sick, they never would have been able to make this claim. But if you just leave it there, you could go if you have a contingent fee, spend a whole bunch of time on this case and then boom, judicial estoppel. It’s a get out of jail free card for the other side and you just spent years litigating this and just wasted your time.
Rocky Dhir: Wow.
J. Robert Vanhemelrijck: And your client could sue you for not having them, ask them the proper questions like, did you ever file bankruptcy before, if you file bankruptcy notify me. So you get a double whammy, you lose your fees and you get sued by your client.
Rocky Dhir: So it sounds like that needs to be part of the intake process, maybe even in an engagement letter, asking a client to swear and affirm and verify that there was no bankruptcy or listing any bankruptcies that may have taken place at an earlier time.
J. Robert Vanhemelrijck: Or they’re going to take place during the case, because in a Chapter 7 it’s just about what you owned at the date of filing or prior to that.
Rocky Dhir: Sure.
J. Robert Vanhemelrijck: In a Chapter 13, it’s anything that you acquired during the case. So I’ve had that happened where they go and they talked to somebody they have a car accident, semi-truck hits, and whatever and the personal injury attorney tells them, well you don’t have to list this one because this didn’t happen till after you filed your Chapter 13. So it’s not properly the estate under 541.
Chapter 13 also has its own provision that will include any type of property that’s listed on 541 that’s acquired during the case. So there that attorney gave them bad advice and which results in the client losing their money and the attorney losing their fees and potentially getting sued.
Rocky Dhir: Fascinating stuff, okay. Catherine, what are some strategic issues that non-bankruptcy practitioners need to know about so that we can look out for them. That was a great advice Robert, thank you.
Catherine Curtis: Robert really hit the nail on the head with estoppel issues. I run into that quite a bit as particularly as a trustee, that’s really important. I think beyond just asking about it, you need to have a procedure in your office where you actually do PACER searches on people that allows you to search the online database using your clients, you know Social Security Number. In case of an individual, you can search by their name. That way you’re not just relying on what they’re telling you, you actually have a way to verify that.
So bankruptcy courts are courts of equity, right. You hear that a lot if you go into bankruptcy court.
One thing in terms of strategic use of bankruptcy, I see some creditors complain. Well, the case should be dismissed because, you know, of XYZ reason. There are specific statutes in the Bankruptcy Code that deal with dismissal. Generally, and Robert can probably chime in on this, if there’s a colorable reason for a debtor to be in bankruptcy for them to be able to either reorganize or for them to have debts that exceed their assets and are a way for their nonexempt property to pay their debts to bankruptcy, the courts can let that case go forward.
And so the most important thing that non-bankruptcy lawyers should be looking at as they are dealing with somebody that’s sort of the outside looking into the bankruptcy system is how is their client going to be treated in the priority scheme? Where do they fall? Because that’s where you know, where the leverage is and you have to have some idea of who the other players are in the case. Because if there’s a secured creditor that swamps most of the assets, well, there may not be a lot left so that’s — you have to have an understanding not just of where your client stands, but where are the other creditors stand too.
Rocky Dhir: So the lesson for all of us, all the non-bankruptcy lawyers out there, the lesson is become friends with a bankruptcy lawyer, get to know them, take them to lunch and know when to call them. So, you know, Catherine Curtis, Robert Vanhemelrijck, we are out of time for this episode. We could actually keep talking about this, this was fascinating. Thank you both so much for taking the time to join us and for walking us through the bankruptcy process. This is the first for our podcast and I know it won’t be the last. Thank you both.
Catherine Curtis: Thank you.
J. Robert Vanhemelrijck: Thank you.
Rocky Dhir: Absolutely. And of course, I want to thank you for tuning in and I want to encourage you to stay safe and continue to be well. If you liked what you heard today, please rate and review us in Apple Podcast, Google Podcast or your favorite podcast app. Until next time, remember, life’s a journey folks. I’m Rocky Dhir, signing off for now.
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