Understanding the Secret Handshake: A Bankruptcy Primer for Non Bankruptcy Attorneys

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1 Understanding the Secret Handshake: A Bankruptcy Primer for Non Bankruptcy Attorneys Candace C. Carlyon, Esq.*, Shareholder Lissa Treadway, CLAS**, Certified Legal Assistant Specialist SHEA & CARLYON, LTD. 233 S. Fourth Street, Second Floor Las Vegas, NV (702)

2 Where Do I Look For Information On Practicing In Bankruptcy Court? In the Bankruptcy Code (Title 11, United States Code); the Federal Rules of Bankruptcy Procedure; the Local Rules of Bankruptcy Procedure; and the Bankruptcy Clerk s Office, located on the 4th floor of the Federal Building at 300 Las Vegas Blvd. S., Las Vegas, NV 89101; and on the 1st floor of the Clifton Young Federal Building (i.e., the old federal building) at 300 Booth Street, Reno, Nevada In the past few years, the bankruptcy court has made a concerted effort to formalize procedures which may have been previously known only to the bankruptcy bar. Administrative orders as well as numerous rules of practice were incorporated into the local rules of the bankruptcy court, which were also renumbered to conform to the Federal Rules of Bankruptcy Procedures. The numbering of both sets of rules are generally as follows: 1000 s - Commencement of the Case 2000 s - Administration, Attorneys and Accountants 3000 s - Claims and Creditors; Plans 4000 s - The Debtor: Duties and Benefits 5000 s - Courts and Clerks 6000 s - Collection and Liquidation of the Estate 7000 s - Adversary Proceedings 8000 s - Bankruptcy Appeals 9000 s - General Provisions The local rules are located in the rules of the U.S. District Court, District of Nevada, which can be found in the Mitchie court rules book. The Clerk s office also maintains copies of such documents as forms to be filed with Motions for Relief From Stay; Requests for Orders Shortening Time; Adversary Cover Sheets; a list of filing fees and copy requirements; United States Trustee Guidelines; Fee Guidelines; and Memoranda from court chambers. The local rules and forms, as well as other information, are also available on the bankruptcy court s website: The telephone number for the Bankruptcy Clerk s office in Las Vegas is (702) and the telephone number for the Bankruptcy Clerk s office in Reno is (775) How Do I Review A Bankruptcy File? Case documents are available on-line through PACER, you can register online at or call Alternatively, you can go to the clerk s office to review the file online. Is The U.S. Trustee The Trustee In Chapter 11? There is often confusion between the role of the Bankruptcy Trustee and the Office of the United States Trustee. A bankruptcy trustee is appointed in every Chapter 7 case, and has the duty to collect and administer the assets of the estate, preside over the meeting of creditors, and perform other duties set forth in 11 U.S.C. 704 and various sections of Chapter 5 of the Bankruptcy Code. The Chapter 7 trustee is selected from a sitting panel of trustees. There is 1

3 also a trustee in each Chapter 13 case, whose duties are set forth in 11 U.S.C Generally, the Chapter 13 Trustee presides over the creditors meeting, reviews and comments on the Chapter 13 plan, and collects and distributes Chapter 13 plan payments. In Reno the Chapter 13 trustee is William A. Van Meter; in Las Vegas, the Chapter 13 trustee is Kathleen McDonald. (As of October 1, 2004, Rick Yarnall will become an additional Chapter 13 trustee for Las Vegas). The office of the U.S. Trustee oversees the individual trustees, and also participates in Chapter 11 cases, reviewing schedules, presiding at the meeting of creditors, and commenting on pleadings (including disclosure statements and fee applications). The office of the United States Trustee is required to be noticed of all proceedings in a Chapter 11 case. The offices are located at 600 Las Vegas Blvd. S., Suite 430, Las Vegas, NV 89101, and 300 Booth Street, Room 2129, Reno, NV Unlike a Chapter 7, the Debtor remains in possession of the assets of the estate in a Chapter 11 or 13, unless otherwise ordered by the court. However, the court may appoint a trustee (or examiner) in a Chapter 11 case where cause is shown, and is required to do so if requested where the debts exceed $5 million. My Client Filed Bankruptcy. What Should I Do? In order to represent a Debtor you must be appointed by the Bankruptcy Court. In a Chapter 7 case, any assets, including claim in litigation (INCLUDING PERSONAL INJURY CLAIMS) belong to the bankruptcy estate and are controlled by the bankruptcy Trustee. This means that the Trustee can select and hire counsel, who must be approved by the bankruptcy court, and that the Trustee will control any settlement as well as the proceeds of such actions. Some recoveries may be subject to exemption. For example, 75% of individual earnings are exempt, as are certain proceeds of life and disability insurance policies. If some or all of the recovery may be exempt, that fact should be clearly disclosed on the schedules. Claims held by the Debtor should be disclosed on Schedule B (personal property) and on the Debtor s Statement of Financial Affairs question 4 (pending litigation); and claims of exemption must be listed on schedule C. The application to approve the employment of special counsel should include the details of the contingency fee arrangement. Although such applications are commonly granted ex parte (upon the review and approval of the Office of the U.S. Trustee), the better practice is to give notice of any unusual arrangement, such as a contingent fee agreement. In addition to obtaining approval of counsel s employment at the outset of the bankruptcy case, the court must approve both the settlement and the payment of fees and costs. Although F.R.B.P. 2017(b) provides that the Bankruptcy Court can review fee agreements if the payment is excessive, the Court is unlikely to reduce a contingency fee if the arrangement was previously noticed to creditors and approved by the Court. I Didn t Know I Needed To Be Appointed. What Do I Do Now? The Bankruptcy Court has discretion to approve a settlement, appoint the plaintiff s attorney as special counsel nunc pro tunc, and to approve a contingency fee agreement. In a Chapter 7 case, the recovery will probably be payable to the Trustee for distribution for creditors. In a Chapter 13 case, the Trustee will generally request that proceeds be contributed to creditors in an amount sufficient to pay all bankruptcy claims, with any balance to be refunded to the Debtor. In some cases, you may need to move to reopen the case to obtain such approval. 2

4 If the case is open, you may move to dismiss the bankruptcy in order to permit the individual to receive the proceeds; however, the bankruptcy court is likely to look upon such a motion with disfavor. My Client Filed Bankruptcy After The Accident But Before The Lawsuit. The Insurance Company Doesn t Know About The Bankruptcy. What If I Settle The Case And Don t Say Anything? The 1994 amendments to the Bankruptcy Code explicitly include debtor s attorneys in the class of people who are guilty of bankruptcy crimes for concealment of assets from creditors or the bankruptcy trustee. Such conduct is a felony carrying a possible sentence of $5,000, five years in prison, or both. See 18 U.S.C. Section 152. How Does My Client Object To Discharge? Objections to discharge must be brought by Bankruptcy Adversary Complaint filed within sixty (60) days of the first date set for the first meeting of creditors. Objections may be grounded in 11 U.S.C. 523 (objection to discharge of particular debt, including debts for fraud, willful and malicious injury and personal injury resulting from DUI) or 11 U.S.C. 727 (objection to discharge of any debts, including for fraudulent concealment of assets failure to maintain adequate records and false statement in the bankruptcy case. It should be noted that if the objection to discharge of a consumer debt under 523 is overruled, the court can award fees and costs to the debtor. 11 U.S.C. 523(d). The time limit for filing an objection is jurisdictional, and generally may be extended only where a motion to extend the deadline is brought within the sixty (60) period for filing objections to discharge. Are There Any Exceptions? 11 U.S.C. 727(d) permits an action to revoke the discharge if the discharge was obtained by fraud (unknown at the time of the discharge) or the debtor committed specific fraudulent acts during the bankruptcy. Debtor s Counsel States That If I Object To Discharge, His Client Will Go Chapter 20. A party completing a Chapter 13 plan obtains a discharge of most debts which could be nondischargeable in a Chapter 7. Debtor s counsel sometimes files a Chapter 7, waits to see if there are objections to discharge and, if so, converts the case to a Chapter 13. (The Debtor has an absolute right to convert to a Chapter 13 under 11 U.S.C. 706(a).) Such a succession (7, then 13) is sometimes utilized when the debtor owes too much to be eligible for Chapter 13 relief under 11 U.S.C. 109(e). 3

5 Are There Special Protections In Bankruptcy For Divorce Obligations? Yes! Support obligations enjoy a priority in distribution (11 U.S.C. 507(a)(7)), are not dischargeable in Chapter 7 ( 523(a)(5)) or Chapter 13 ( 1328 (a)(1)), and the automatic stay does not stop efforts to collect support obligations from property other than property of the estate (in a Chapter 7, this generally includes post-bankruptcy wages). However, an agreement or state court order is not conclusive as to whether an award is actually in the nature of a support obligation. Therefore, the best practice is to move to lift the stay in order to collect support awards. In addition, property settlement obligations may be excepted from discharge (if a complaint is timely filed) unless the court finds that the Debtor does not have the ability to pay, or that the benefit to the Debtor of the discharge would outweigh the detriment to the spouse, former spouse or child. How Do I Obtain A Hearing Date? For a regular motion, hearing dates may be obtained by calling the court clerk at in Las Vegas, (702) in Reno. It is hoped that this article will provide some basic information for new and non - bankruptcy attorneys who find themselves in bankruptcy court. Members of the Nevada bar are welcome to contact the author for further information or assistance. In addition, both the Northern Nevada Bankruptcy Bar Association and the Southern Nevada Association of Bankruptcy Attorneys hold monthly luncheon meetings. *Ms. Carlyon has been practicing primarily in the area of insolvency and creditors rights since 1986, and has participated in such cases as AgriBioTech, Aladdin Gaming, Resort at Summerlin, Arizona Charlies, Goldriver, Riviera, Ballys, Marina and Landmark. She is also a former law clerk to the Hon. Justice Cliff Young. ** Ms. Treadway is a Certified Legal Assistant and a Certified Legal Assistant Specialist in bankruptcy. She has been employed in the legal profession since 1988 and has worked in the area of bankruptcy since She is Vice President of the Nevada Paralegal Association, and a member of the Legal Assistants Division of the State Bar of Nevada and the National Association of Legal Assistants. 4