  
|
Return to Contents
|
|
|
|
|
|
|
|
How Bankruptcy Affects Landlords, Part 2 of 3
By Thomas Rice and Patrick Huffstickler
|
damaged disproportionately to any benefit to be derived by the general creditors…” Id. at 801.
Another way to describe the court’s role in the assumption or rejection process is that of overseer of the wisdom of management of the debtor’s property as contrasted with the decider of disputes between a debtor and its creditors, including its landlord. Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026 (1994). Here, it should be noted, that when courts apply the business judgment rule they are not generally exercising their independent review and analysis of the proposed decision, but simply determining if the decision is supported by a rational business view, and that assumption and rejection matters are considered summary proceedings where the court is simply attempting to review the trustee or DIP’s decision to assume or reject a lease to provide for the “swift administration” of the estate. Orion Pictures, 4 F.3d at 1098. With this consideration in mind, it is clear that the bankruptcy courts will generally defer to the trustee’s or DIP’s decisions regarding assumption and rejection issues based upon the court’s view that administration of the bankruptcy estate would be enhanced. In short, while it may be unfortunate, the bankruptcy courts tend to focus a good deal less on the rights of lessors and give greater deference to the position of the debtor. This is especially true in the context of reorganization cases under Chapter 11, as the debtor will certainly argue that either assumption or rejection of the lease benefits its ability to reorganize.
C. Assumption or Rejection of Entire Agreement
While the debtor is given the opportunity to assume or reject its executory contracts and leases, it is important to recognize that assumption or rejection of the lease must be made with respect to the entire agreement. See In re Audra-John Corp., 140 B.R. 752 (Bankr. D. Minn. 1992) (citing cases). Partial assumptions or assumptions of select provisions of lease are not authorized and the trustee or DIP assumes or rejects unexpired agreements
|
|
|
|
III. ASSUMPTION, ASSIGNMENT, AND REJECTION OF LEASES IN BANKRUPTCY
A. Debtor’s Option
Under section 365 of the Bankruptcy Code, the trustee or debtor in possession has three options in dealing with an unex-pired lease. The debtor may:
(1) assume the lease;
(2) assume and assign the lease to a third party; or
(3) reject the lease.
11 U.S.C. § 365(a). Section 365 allows the DIP or trustee to reject burdensome agreements while requiring the other party to the agreement to continue to do business with the debtor even though they may not want to as a result of the bankruptcy filing. See In re Chateaugay Corp., 10 F.3d 944, 954-955 (2d Cir. 1993). The Bankruptcy Code provides flexibility in connection with the right to assume or reject leases so as to balance the state law rights of landlords to receive the benefit of their bargain as set out in the lease with the congressionally mandated rights of debtors. See In re Circle K Corp., 190 B.R. 370, 376 (B.A.P. 9th Cir. 1995).
Here, it should be recognized that issues sometimes are raised as to whether the Debtor, DIP, trustee or other party can request lease assumption. See, e.g., In re Lil’ Things, Inc., 220 B.R. 583 (Bankr. N.D. Tex. 1998); In re Brewer, 233 B.R. 825 (Bankr. E.D. Ark. 1999) (Chapter 13 Debtor could assume rental agreement).
B. Business Judgment Rule For Assumption
The decision as to whether assume,
|
assume and assign, or reject a lease is governed by the so-called “business judgment” rule. See Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir. 1985). See also, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), cert. denied, 475 U.S. 1057 (1986). The business judgment rule essentially allows the trustee or DIP to determine, in its “business judgment”, whether assuming or rejecting the lease will benefit the bankruptcy estate. As noted by the Fifth Circuit in Richmond Leasing, as long as the assumption of an agreement enhances the debtor’s estate, it should be approved unless the assumption would be clearly erroneous, too speculative, or contrary to applicable provisions of the Bankruptcy Code. Richmond Leasing, 762 F.2d at 1309.
Under the business judgment rule, the court does not substitute its judgment for that of the DIP or trustee, but simply evaluates whether the decision is so manifestly unreasonable that it cannot be based on sound business judgment, but only on bad faith, whim or caprice. See Richmond Metal Finishers, 756 F.2d at 1047. Of course, bankruptcy courts, as courts of equity, while generally rubber stamping the decision of the debtor or trustee, do not completely vacate the field. For instance, in In re Chi-Feng Huang, 23 B.R. 798 (B.A.P. 9th Cir. 1982), the court stated that the business judgment test may involve a balancing of interests of the general unsecured creditors of the debtor with that of the other party to the agreement. The court stated “it is proper for the court to refuse to authorize rejection of a lease or executory contract where the party whose contract is to be rejected would be
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in their entirety. Century Indem. Co. v. NGC Settlement Trust (In re National Gypsum Co.), 208 F.3d 498, 506 (5th Cir. 2000). In this context, it is often stated that the trustee or DIP has to assume the agreement or reject the agreement in its entirety, with both its benefits and its burdens. See, e.g., City of Covington v. Covington Landing L.P., 71 F.3d 1221 (6th Cir. 1995). On the other hand, if the agreement contains separate, severable agreements, the debtor may reject some, but not others; rejection does not require rescission of executed portions. Stewart Title Guar. Co. v. Old Republic Nat’l Title Ins. Co., 83 F.3d 735 (5th Cir. 1996); In re Adelphia Bus. Solutions, Inc. 322 B.R. 51(Bankr. S.D.N.Y. 2005) (citing numerous cases).
D. Extension of Time to Assume or Reject Non-residential Real Property Leases
Under BAPCPA, Congress revised the time periods relating to the debtor’s ability to assume or assume and assign a non-residential real property lease. Section 365(d)(4)(A) now provides that:
(4)(A) Subject to subparagraph (B), an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of – (i) the date that is 120 days after the date of the order for relief; or (ii) the date of the entry of an order confirming a plan.
11 U.S.C. § 365 (d)(4)(A). Initially this gives the debtor a longer period of time to review its nonresidential real property leases when compared to the previous section 365 (d)(4).2 The DIP or trustee’s previous unilateral right to request an extension, however, is then limited under BAPCPA, to a single 90 day extension of the deadline, after demonstrating “cause” for such extension. “The court may extend the period determined under subpara-graph (A), prior to the expiration of the
|
120-day period, for 90 days on the motion of the trustee or lessor for cause.”
11 U.S.C. § 365 (d)(4)(B)(i). While there had been previous debate over the grant of extensions to debtors, it was unquestioned that the debtor had the unilateral right to at least seek an extension. The Fifth Circuit had stated that courts should be cautious about allowing such extensions and that extensions of the section 365(d)(4) deadline should be limited in time and it is better to have several short extensions rather than a single lengthy extension. In re American Healthcare Management, Inc., 900 F.2d 827 (5th Cir. 1990). On the other hand, other circuit courts had indicated that it would be appropriate to grant a lengthy extension and bankruptcy courts following those circuit court cases often extended the deadline through the date of confirmation of the plan of reorganization. See In re Channel Home Ctrs., Inc., 989 F.2d 682 (3d Cir. 1993). See also In re Klein Sleep Prods., Inc., 78 F.3d 18 (2d Cir. 1996) (due to potential administrative expense claims, extension of the section 365(d)(4) deadline
|
for lengthy periods, including through confirmation, is appropriate). Under BAPCPA, if the debtor needs further extensions beyond the 210 days, then the debtor must get the prior written consent of the landlord. “If the court grants an extension under clause (i), the court may grant a subsequent extension only upon prior written consent of the lessor in each instance.” 11 U.S.C. § 365 (d)(4)(B)(ii). Numerous commentaries have been written about the impact that the new section 365(d)(4) will have on complex national retail cases involving numerous leased locations. Bruce Buechler, Esq. and Bruce S. Nathan, Esq., The Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on Real Property Lessors and Owners and Other Bankruptcy Law Developments, New York State Bar Association, Committee on Leasing, January 18, 2006; Brendan Linehan Shannon and Ian S. Fredericks, Summary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, ABI Committee News: Financial Advisors Committee, May 2005; Robert N.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H. Christmas, Designation Rights – A New, Post-BAPCPA World, American Bankruptcy Institute Journal, February 2006.
Previously, under section 365(d)(4) of the Bankruptcy Code, the trustee or DIP could extend the initial 60-day period for “cause.” Cause is not defined in the Bankruptcy Code; however, several courts have enumerated a number of factors to be considered in determining if cause existed for an extension of the previous 60-day deadline. While there are no currently reported decisions relating to the establishment of “cause” under section 365(d)(4)(B)(i), it would appear that the previously established case law enumerating factors for consideration by courts would still be applicable. In In re S & M Food Services, Inc., 117 B.R. 497, 498 (Bankr. E.D. Mo. 1990), the factors considered by the court included: (1) whether the leases are a primary asset
of the debtor; (2)if the leases were rejected, whether the debtor’s business operations would likely terminate; (3) whether the decision to assume or reject is a vital consideration in the debtor’s preparation of a reorganization plan; (4)the time the debtor has had to review its position with respect to commercial leases; (5) whether the debtor has had a reasonable period of time to determine the value of the commercial leases and the context of the various alternatives in a plan of reorganization; (6)whether the post-petition lease payments are current; (7)whether a dispute exists between the debtor and certain lessors with respect to the amount due pre-petition; (8)that the commercial properties are occupied by the debtor and the debtor is conducting active business at each of these locations;
(9) whether the debtor is actively attempting to formulate a reorganization plan;
(10) no evidence indicating that the lessors would suffer unnecessary harm or prejudice if the period to assume or reject is extended.
|
Other factors considered by the courts are whether the case is complex and involves a large numbers of leases for the debtor to analyze and determine the appropriateness of assumption or rejection. See In re Wedtech Corp., 72 B.R. 464 (Bankr. S.D.N.Y. 1987). The We d t e c h court also noted that certain factors weigh against an extension of the deadline to assume or reject: (1) where the debtor fails to keep current
on lease payments; (2)where the landlord is damaged beyond
a point that it can be compensated
under the Bankruptcy Code; or (3) where the debtor fails or is unable to
formulate a plan of reorganization
within a reasonable time.
We d t e c h , 72 B.R. at 472. See also In re Burger Boys, Inc., 94 F.3d 755, 761 (2d Cir. 1996); In re Beautyco, Inc., 307 B.R. 225, 231 (Bankr. N.D. Okla. 2004); In re Service Merchandise, Co., 256 B.R. 744 (Bankr. M.D. Tenn. 2000); In re Musikahn Corp., 57 B.R. 938 (Bankr. E.D.N.Y. 1986) (stating that the trustee must have time to make a “careful and informed assessment of the lease’s benefits and burdens to the estate”).
E. Time to Assume Personal Property Leases
In a Chapter 11 case, the trustee or the DIP may assume or reject a lease of personal property of the Debtor at any time before the confirmation of a plan. However, the court, on request of any other party to the contract or lease, may order that the trustee (or DIP) determine within a specified period of time whether to assume or reject such contract or lease. 11 U.S.C. § 365(d)(2).
Here it should be noted that there is a potential fourth option if both debtor and the landlord are indifferent (or cagey?) as to a personal property lease or residential real property lease, which is to not really address the agreement in the bankruptcy and let it “ride through” the bankruptcy.3 While this scenario really shouldn’t exist under Bankruptcy Code section 365, it does seem to occur in rare instances and, when faced with the situation, the courts seem to take the position that the failure to address the agreement in the bankrupt-
|
cy case means that it continues to exist and that the party’s rights are essentially unchanged, such that they should look to state law after the bankruptcy case is concluded to determine the parties’ respective rights and obligations. This is known as the “Ride-Through Doctrine.” See, e.g., Stumpf v. McGee (In re O’Connor), 258 F.3d 392 (5th Cir. 2001); In re Hernandez, 287 B.R. 795 (Bankr. D. Ariz. 2002) (good discussion of doctrine). See also, In re Nat’l Gypsum Co., 208 F.3d 498 (5th Cir. 2000).
To a certain extent, the “Ride Through” doctrine has been modified by BAPCPA. In the case of an individual that is a chapter 11 debtor, section 365(p)(3) now provides that:
In a case under chapter 11 in which the debtor is an individual and in a case under chapter 13, if the debtor is the lessee with respect to personal property and the lease is not assumed in the plan confirmed by the court, the lease is deemed rejected as of the conclusion of the hearing on confirmation. If the lease is rejected, the stay under section 362 and any stay under section 1301 is automatically terminated with respect to the property subject to the lease.
11 U.S.C. § 365 (p)(3). The fact that unexpired personal property leases will now be deemed rejected, if they are not assumed by the debtor in the plan confirmed by the court, should limit any argument that the unexpired personal property lease “Rides Through” the bankruptcy case.
F. Duty to Perform
Pending the decision to assume or reject, the trustee or DIP is required, with respect to leases of non-residential real property, to perform all of the obligations in a timely fashion. 11 U.S.C. § 365(d)(3). The trustee or DIP is also required to immediately surrender the premises under the non-residential real property lease in any case where the lease has been deemed rejected by expiration of the initial 60-day period or any extended period. 11 U.S.C. § 365(d)(4). Once the lease has been reject-s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ed, it cannot be revived by a plan of reorganization. In re Tri-Glied, Ltd., 179 B.R. 1014 (Bankr. E.D.N.Y. 1995); In re BSL Operating Corp., 57 B.R. 945 (Bankr. S.D.N.Y. 1986).
In connection with the decision to assume or reject, it should be noted that the Bankruptcy Code provides for a distinction between the treatment of unex-pired residential leases and unexpired non-residential leases. Under section 365(d)(2) of the Bankruptcy Code, in a Chapter 11 bankruptcy, the trustee or DIP may assume or reject an unexpired lease of residential real property at any time until the confirmation of the Plan unless the court shortens or lengthens the time period. The distinction between residential and non-residential leases was implemented under the Bankruptcy Amendments and Federal Judgeship Act of 1984 as there was no distinction prior to this time between residential and non-residential real property leases. Prior to the 1984 amendments, the trustee or DIP had until confirmation to assume or reject its executory contracts, including its leases. The Bankruptcy Amendments and Federal Judgeship Act of 1984 enacted the 60-day period to assume or reject non-residential real property leases unless the court extended the period and placed the burden on the debtor to obtain the extension or risk rejection of the lease by operation of law under section 365(d)(4). See In re Circle K Corp., 190 B.R. 370 (B.A.P. 9th Cir. 1996).
It is also important to note that the bankruptcy court has the ability to excuse the debtor from performing its lease obligations that arise during the first 60 days of the bankruptcy case, but the delay in performing such obligations cannot extend past 60 days. 11 U.S.C. § 365(d)(3).
G. Shortening the Time for Assumption or Rejection of an Unexpired Lease
A non-debtor party to an unexpired lease may request that the Court require the Trustee or DIP to determine whether to assume or reject an unexpired lease at any time. 11 U.S.C. § 365(d)(2). In this circumstance, the court balances the equities to determine if the Trustee or DIP should
|
be required to take such action. The determination of a reasonable time to compel the debtor to assume or reject the unex-pired lease is within the Bankruptcy Court’s discretion “in light of the circumstances of each case.” In re Burger Boys, 94 F.3d 755, 761 (2d Cir. 1996). In determining what constitutes a reasonable time, the Second Circuit has set out a number of factors, including: (1) damage the non-debtor party will suffer beyond the compensation available under the Bankruptcy Code; (2) the importance of the contract to debtor’s business and its reorganization; (3) whether the debtor has had sufficient time to appraise its financial situation or the potential value of its assets in formulating a plan; (4) whether exclusivity has terminated; (5) the complexity of the case; (6) the number of similar contracts or leases the debtor must evaluate; and (7) the need for judicial determination of whether a lease exists. See In re Enron Corp., 330 B.R. 387 (Bankr. S.D.N.Y. 2005) (citing Theatre Holding Corp. v. Mauro, 681 F.2d 102, 105-06 (2d Cir. 1982) and In re Burger Boys, Inc., 94 F.3d at 761 for the relevant factors and consideration of a reasonable time to compel assumption or rejection of a contract).
H. Curing of Defaults and Adequate Assurance of Future Performance
In connection with an assumption, in order for the court to approve the assumption, the debtor must cure its pre-petition and post-petition defaults pursuant to section 365(b) of the Bankruptcy Code. Under BAPCPA, the ability of the trustee or DIP to cure non-monetary defaults was expanded. Previously, there was a split among the Circuit Courts as to whether a trustee or DIP had to cure non-monetary defaults prior to assumption. Compare In re Bankvest Capital Corp., 360 F.3d 291 (1st Cir. 2004) (non-monetary defaults do not need to be cured) with In re Claremont Acquisition Corp., 113 F.3d 1029 (9th Cir. 1997) (non-monetary defaults must be cured). In the Claremont case, the debtor sought to assume and assign its interest in a dealership agreement. The debtor had previously failed to operate the dealership for a period beyond seven (7) consecutive days, which was a
|
non-monetary default under the dealership agreement. In considering an appeal of the bankruptcy court’s decision to approve the assumption and assignment, the Ninth Circuit Court of Appeals was required to consider whether the debtor was required to cure the non-monetary default in order to assume the contract. Id. at 1032-35. The Ninth Circuit held that the debtor was required to cure non-monetary defaults and that since the debtor was unable to cure its previous inability to operate, the dealership agreements could not be assumed. Id. at 1034-35. The new provisions of BAPCPA provide that:
(b)(1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee-(A) cures, or provides adequate assurance that the trustee will promptly cure, such default other than a default that is a breach of a provision relating to the satisfaction of any provision (other than a penalty rate or penalty provision) relating to a default arising from any failure to perform non-monetary obligations under an unexpired lease of real property, if it is impossible for the trustee to cure such default by performing nonmonetary acts at and after the time of assumption, except that if such default arises from a failure to operate in accordance with a nonresidential real property lease, then such default shall be cured by performance at and after the time of assumption in accordance with such lease, and pecuniary losses resulting from such default shall be compensated in accordance with the provisions of this paragraph.
11 U.S.C. § 365(b)(1)(A). This new provision allows the trustee or DIP to assume a contract, which may have been subject to a non-monetary default that could only previously be cured with the use of a time machine, by providing that performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of these provisions must occur at the time of assumption. The non-debtor party to the lease will also be entitled to recover any pecuniary losses that were associated with the debtor’s failure to previously perform its non-monetary obligations.
If the debtor is in default, it must also show it can provide adequate assurance of future performance. In re Rachels Industries, Inc., 109 B.R. 797 (Bankr. W.D. Tenn. 1990). What constitutes adequate assurance of future performance is decided on a case-by-case basis. See, e.g., In re Texas Health Enters., 246 B.R. 832 (Bankr. E.D. Tex. 2000). The courts state that adequate assurance of future performance is generally less than an absolute guarantee of performance. The courts often refer to simply a showing by the debtor that its financial condition reflects an income stream and financial strength sufficient to meet the debtor’s lease obligations, that the general economic outlook in the debtor’s industry is sufficient for debtor to operate and, to the extent applicable, that a guarantee of the lease obligations by a liquid third party exists. See In re Carlisle Homes Inc., 103 B.R. 524, 538 (Bankr. D.N.J. 1988).
The burden of proof for demonstrating that adequate assurance has been provided is on the debtor. In re Rachels Indus., Inc., 109 B.R. 797, 802 (Bankr. W.D. Tenn. 1990). A debtor cannot choose to accept the benefits of a contract without accepting the corresponding burdens imposed by the same agreement. Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir. 1985).
The Second Circuit discussed the importance of requiring debtors to demonstrate adequate assurance of future performance in In re Ionosphere Clubs, Inc., 85 F.3d 992 (2d Cir. 1996), stating that Congress’s intent in imposing conditions on the ability of the debtor to assume the contract was “to insure that the contracting parties receive the full benefit of their bargain if they are forced to continue performance.” Id. at 999(citing In re Superior Toy & Manufacturing Co., 78 F.3d 1169, 1174 (7th Cir. 1996) (“If the trustee is to assume a contract or lease, the court will have to insure that the trustee’s performance under the contract or lease gives the other contracting party the full benefit of his bargain.” (quoting S. Rep. No. 989, 95th Cong., 2d Sess. 59 (1978), reprinted in
|
1978 U.S.C.C.A.N. 5787, 5845; H.R. Rep. No. 595, 95th Cong., 2d Sess. 348 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6304-05.)). Bankruptcy courts need not approve every contract that is beneficial to the debtor if the debtor cannot assure performance on the contract. Richmond Leasing Co., 762 F.2d at 1309. Assurance of performance provides a measure of protection to the non-debtor. In re Nat’l Gypsum Co., 208 F.3d 498, 506 (5th Cir. 2000). See also In re General Oil Distributors, Inc., 18 B.R. 654, 658 (Bankr. E.D.N.Y. 1982)(“What constitutes adequate assurance is a factual question to be determined on a case by case basis with due regard to the nature of the parties, their past dealings and present commercial realities.”). A recent case out of the Fifth Circuit, Tex. Health Enters. V. Lytle Nursing Home (In re Tex. Health Enters.), No. 02-40734, 2003 U.S. App. LEXIS 15490 (5th Cir. July 31, 2003) highlights the consideration courts must undertake in determining whether the debtor has provided adequate assurance of future performance. In Te x a s Health, the debtor sought to assume a management contract to operate a nursing home for the benefit of the estate. The counterparty to the management agreement objected to its assumption. The debtor presented testimony that the management contract was beneficial to the estate and that the debtor was prepared to cure its defaults and provide adequate assurance of future performance. Testimony on behalf of the counterparty demonstrated that the debtor had a history of monetary defaults, poor communication, and outright refusals to follow instructions from the counterparty. The bankruptcy court found in favor of the counterparty and held that the contract could not be assumed. Id. at **7. On appeal, the debtor argued that the bankruptcy court must allow assumption if the contract would benefit the estate and that the bankruptcy court could not rely on evidence of prior defaults to support its conclusion that the debtor was unable to perform. The Appellate Court noted that assurance of performance provides a measure of protection to the non-debtor. Id. at **8. The Court of Appeals then addressed whether it was appropriate to consider prior defaults and found that “[e]vidence of prior defaults, though, is
|
probative of whether the debtor will be able to perform in the future.” Id.
I. Compensation for Pecuniary Loss
In connection with an assumption, the debtor is required to compensate the other party to the lease (or provide assurance that it will promptly compensate the other party to the lease) for its actual pecuniary loss in connection with any defaults under the lease. See 11 U.S.C. § 365(b)(1)(B). As previously stated, BAPCPA also provided under section 365(b)(1)(A), that previously losses resulting from certain non-monetary defaults must also be cured in order to assume an unexpired lease. 11 U.S.C. § 365(b)(1)(A). This can be an important provision as actual pecuniary losses have been found to include attorney’s fees. In re Westworld Community Healthcare, Inc., 95 B.R. 730, 733-34 (Bankr. C.D. Cal. 1989) (Section 365 creates an independent ground for recovery of attorney’s fees in connection with the assumption of a lease). However, it should be noted that the majority of courts require that the underlying lease provide for attorney’s fees and that section 365(b)(1)(B) does not create an independent right to recover attorney’s fees. See In re Westside Print Works, Inc., 180 B.R. 557 (B.A.P. 9th Cir. 1995). See also Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Inc.), 167 F.3d 843 (4th Cir. 1999); In re Child World, 161 B.R. 349, 353-54 (Bankr. S.D.N.Y. 1993); In re Hillsborough Holdings Corp., 126 B.R. 895, 898 (Bankr. M.D. Fla. 1991) (rejecting In re Westworld); In re Joshua Slocum, Ltd., 103 B.R. 601, 607-08 (Bankr. E.D. Pa. 1989) (rejecting In re Westworld and holding subsection (B) does not create an independent right to attorney’s fees).
In an interesting Texas case, In re Eagle Bus Mfg., 148 B.R. 481 (S.D. Tex. 1992), the bankruptcy court addressed the issue of whether the cure provisions of section 365 require payment of interest in connection with assumption. The bankruptcy court found that where the lease was silent and state law failed to provide for interest on unpaid rents, payment of interest was not a pre-requisite for assumption of an unex-pired lease. In re Eagle Bus Mfg., 148 B.R. at 482-83.
Thomas Rice is a shareholder with the law firm of Cox Smith Matthews Incorporated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
specializing in bankruptcy matters. He has practiced law for 6 years and has extensive experience in representing debtors, creditors, and chapter 11 Trustees in numerous national, regional, and local bankruptcy cases. Mr. Rice graduated from the University of California, Los Angeles in 1995 and from the Pepperdine University School of Law in 1999 (cum laude).
Patrick L. Huffstickler is a shareholder
|
with the law firm of Cox Smith Matthews Incorporated specializing in bankruptcy matters. He has practiced law for 20 years and has extensive experience in representing landlords and tenants in numerous national, regional, and local bankruptcy cases. Mr. Huffstickler also handles uniform commercial code and other commercial litigation matters. Mr. Huffstickler represents commercial landlords, including retail malls and
|
shopping centers, with respect to numerous issues involving real property leases, including negotiating and drafting termination and modification agreements, in both bankruptcy and non-bankruptcy matters. Mr. Huffstickler graduated from Trinity University in 1983 (cum laude) and from the University of Texas School of Law in 1986 (with honors).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig Hackler, Financial Advisor, Raymond James Financial Services
|
value of old and new shares on the date the stock dividend is distributed. There are a few cases where a dividend paid in stock may be taxable. The most common occurs when the shareholder is given a choice to receive a dividend paid in cash or in stock. A distribution of stock rights, in most cases, is also not a taxable event. The holding period of shares acquired by virtue of a stock split relates back to the original shares. In other words, the holding period of the old shares is “tacked on” to the holding period of the new shares.
Craig Hackler holds the Series 7 and Series 63 Securities licenses, as well as the Group I Insurance license (life, health, annuities). Through Raymond James Financial Services, he offers complete financial planning and investment products tailored to the individual needs of his clients. He will gladly answer your questions. Call him at 512.894.0574 or 800.650.9517
|
|
|
|
I
t would seem that the income taxation of dividends ought to be a pretty simple topic. Alas, nothing is simple when it comes to taxes. As you get ready to look at your taxes, here’s a summary of some of the basic rules regarding the taxation of dividends.
For our purposes, we’ll restrict our discussion to dividends paid by tax-paying “C” corporations. Many smaller companies are organized as “S” corporations. An S corporation has all the state law attributes of a regular corporation (limited liability, perpetual life, etc.) but is taxed much like a partnership with earnings and losses flowing through the corporation to the returns of the individual shareholders. We’re also not going to deal with mutual fund dividends.
The “garden variety” dividend that is paid by a corporation is taxable to individuals as a qualified dividend and is taxed at their long-term capital gains rate. An individual pays taxes on the dividends based on the year in which they are received, not in the year on which the dividend is based. A dividend is taxed to the buyer of a stock if the stock is purchased after it is declared but before it is paid if the purchase occurs before the ex-dividend date. Similarly, the dividend is taxed to the seller if the sale occurs after the ex-dividend date but before payment date. This holds true even if the dividend is reflected in the selling price of the stock.
Sometimes a company will make a div-
|
idend payment that is in excess of its accumulated earnings and profits. This is probably most common among utility companies. These dividends are deemed to be “return of capital.” Return of capital dividends are not taxable. However, the taxpayer must reduce his/her basis in the stock by the amount of the return of capital dividend. Return of capital dividends in excess of basis are taxed as capital gains. Some corporations permit dividends to be reinvested in company stock. Generally, these reinvested dividends are taxable to the shareholder. In addition, depending on how the plan is structured, the shareholders may have to pay taxes on the commissions or other transaction costs paid by the corporation in running the
|
|
|
|
plan. The shareholder receives basis in the reinvested shares equal to the amount of the dividends included in income. Note, that from 1982 to 1985 taxpayers were allowed to exclude up to $750 ($1,500 on joint returns) in certain reinvested utility dividends. These reinvested shares have a zero cost basis.
Stock splits and stock dividends are generally not taxable events. Taxpayers merely adjust their basis to spread it among more shares in pro-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Ways to Mess Up E-Discovery
|
not been properly trained or credentialed, then the evidence may be disallowed (see Reason #2).
8. Viewing PST Files in Your Own Outlook
Most of us have done this one time or another. You receive a CD from your client or opposing counsel containing several Microsoft Outlook mailboxes (otherwise known as .pst files). Yo u naturally want to see what’s in them. So you import one of those .pst files into your Outlook, and you print out one of the messages: what is on the top of the page? YOUR name, not the name of the original owner; you now “own” that mailbox. Don’t produce anything from that folder; opposing counsel may say that the data has been spoliated, or tainted. If you still want to do this, it is suggested you first copy the .psts to other media, then import to your Outlook; just make sure you don’t use the original files.
If you have several .pst files to review, you should consider a third-party vendor who could help cull-down or filter thousands of emails (and their attachments) in hours or days by using keyword searches and date ranges; this could save you weeks or months of review.
7. Letting the Client Do All of the Data Harvesting
Even clients with the best intentions and talent will miss something. Chances are they will be supplying only the active files from the custodians’ computers. There may be deleted files that could be forensi-cally saved that may be valuable to your case. One of our clients won their case by finding such a file forensically.
Again, as discussed in Reasons #9 and #2, the qualifications of whomever is gathering the data will be questioned, so make sure they are properly trained and have the right certifications (see Reason #2).
Finally, it just looks bad that a client’s employee is gathering the data for a case. Opposing counsel will try to discredit them by suggesting that they just got files favorable to their case, thus protecting their paycheck. Data acquisition by a third party helps eliminate those perceptions. In
|
|
|
|
Malcolm Wells, Litigation Solution, Inc.
|
please check with your Network Administrator or helpdesk to be sure; Work with a third-party vendor to scan the CDs as part of their E-Discovery services; this is particularly a good thing to do if you have a lot of CDs to review.
9. Connecting Hard Drives to your PC or Network
Your IT person is probably one of the most knowledgeable folks around when it comes to data stuff; however, that doesn’t mean that they have been trained to work with the data in a forensically sound and admissible manner. That’s no slight to them; they just may not understand the legal ramifications of handling evidence. Just because they can find information on the hard drive received doesn’t mean they should.
This can be a bad thing for several reasons:
• Every time a hard drive is powered-up or booted-up, the operating system writes files to it. That may write over “deleted” information on the hard drive that could be used for evidence;
• If the hard drive is attached to a network, files from your users could accidentally be written to that hard drive, tainting the evidence. This happened in a Department of Justice case where proprietary information was written to the hard drives in question, and then produced to the opposing side; See
United States v. Rigas, 281 F. Supp. 2d 733 (S.D.N.Y. 2003).
If the IT staff (or even your current vendor) do not use write-blocking devices, the hard drive WILL be altered. Write-block-ing devices prevent information from being written to the hard drives, and prevent the last access dates for files and folders from being changed. If the people handling the hard drives have
|
|
|
|
O
n December 1, 2006, the new Amendments to the Federal Rules of Civil Procedure Addressing Discovery of Electronically Stored Information went into effect. More simply put, the rules on how to use E-Discovery changed on that date. While the rotation of the earth did not stop, and there were no major riots in the streets, the changes were significant to attorneys and paralegals alike. The degree of understanding the rules and what they mean can give you either a substantial competitive advantage, or a devastatingly competitive DISadvantage.
E-Discovery is still a mystery to many people, so the rules changes add yet another layer or two of confusion. So, in an effort to make things a little simpler, here are ten common ways we’ve seen clients ruin perfectly good E-Discovery:
10. Not Checking CDs for Viruses and Malware
This is easy enough: you receive a CD as evidence and you want to see what’s on it. Most of us, however, have an “autorun” feature for our CD drives that automatically runs whatever executable may be on the CD. There have been cases where a person being investigated “accidentally” leaves a CD to be found; unbeknownst to the finder of said CD, the suspect has put a file on the CD that launches a virus or worm onto the hard drive (and potentially the office network), or it launches malevolent software (malware) that wipes out the entire hard drive. To resolve this, you can: deactivate the autorun feature being holding down the shift key while the CD is inserted (not always reliable); change your registry to turn off the autorun feature permanently (not something a typical user should do); scan the CD for viruses on a “safe” PC. In some firms, this may be done automatically by your virus-scanning software —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
addition to this, simply “Ghosting” a hard drive is not a forensically sound method of acquiring hard drive.
6. Don’t Have A Plan (or Plans)
Yo u need to take a systematic approach, like you would in the paper world:
• Create procedure manuals, so everyone’s doing it the same way.
• Is law firm going to host the data during review?
• Is vendor going to host the data during review?
• Keep production in mind when designing review procedure.
And who will do the reviews? Typically, the Law Firm will perform the subjective review, determining a document’s relevance, issues, privilege, etc. The objective review can be performed by a third-party vendor by searching key words, date ranges, individuals, filetypes, etc. We did an objective review for one client, reducing 13GB of emails (a million pages) to a little over 900MB (70,000 pages) in a matter of hours.
|
5. Print Everything or Convert Everything to TIFF Images
We hear this a lot, but it is just impractical from several angles:
Very slow to search:
Let’s assume about 20GB of information: that would generate about 1,540,000 printed pages. If we assume it takes 1 second to review each page for relevance; that’s 25,667 minutes, or about 427 hours. That is almost 11 forty-hour work weeks. Since it is unlikely that the second-per-page review would actually happen, let’s assume 10 seconds per page; that increases the review time to 2 years! And that is just to review for relevance!
Loss of metadata:
Most Windows-based software products embed information about the document within the document itself. Information such as the author, creation date, modification date, last print date, even the directory structure can be saved in the metadata. This can be valuable data for your case. When you print the document, the metadata does
|
not print; if you image the document, the metadata is not included. It can be searched, however, by several software products that analyze and review native-format files, and can be included in keyword searches. More and more companies are masking and scrubbing their metadata, but there is a good chance it is still available for your case.
Cost:
We had a client that was adamant about printing the E-Discovery he received. 17 Microsoft Outlook mailboxes were going to generate about 600,000 pages, take about a week to print and cost about $185,000. As an option, converting everything to TIFF would take 2-3 days at an approximate cost of $136,000. To do an objective review with keyword searching of the native-format files could be done in less than 24 hours at a cost of $4,250. Guess what he ended up doing?
4. Not Understanding Your Client’s Systems or Data
The new rules mandate that the attorneys
|
|
|
|
|
|
|
|
|
|
discuss their E-Discovery needs at a Meet-and-Confer early in the case. If the attorney does not understand his client’s information infrastructure, he may not realize what opposing counsel is asking for, or understand what it will take to get it. It doesn’t mean that he needs to start wearing a pocket protector, but he should probably get help from someone who does.
The kinds of questions that will come up in the Meet-and-Confer will include:
• What information is to be examined: email, edocs, web mail, instant messaging, PDAs, cell phones?
• Where is the information stored? Hard drives, backup servers, email servers, “ghost images”?
• How will it be produced? CDs, TIFFs, printed out, hard drives?
• Will it be “unduly burdensome” to access and review?
Yo u need to prepare a collections plan: Interview IT staff to determine retention policies and physical location of data and backup media. Not just the CIO, but the people that do the actual work—you’ll be amazed at what they know and where it is. How many PCs? What operating systems? What are the sizes of the hard drives, etc.? How many servers? Where are they? What network operating systems? What are the sizes of the hard drives, etc.? What is the email system? Where are the files stored (on individual workstations? On Exchange Server? Both?) How many custodians? Is there a log in HR file of what equipment was issued to particular employees? What are the document retention/destruction policies and plans? What are the litigation hold policies and plans? Do they even have plans? How can you help them create those plans?
3. Making Promises You Can’t Keep
Make sure you get your client’s IT department and/or outside consultants involved early on. Just because a plan has been agreed to doesn’t mean it’s the right plan. Don’t agree to produce the last ten years of emails if you don’t understand what that really means. Accept that there are things you don’t know you don’t know. Most attorneys know the law, but don’t know IT; on the other hand, the IT guys know
|
bits and bytes, but don’t know the law. Yo u need to find a common language between legalese and techno-babble and work together to develop a successful E-Discovery plan and procedures.
2. Using the Wrong People to Collect the Data
Two key phrases in the E-Discovery world are “forensically sound” and “admissible evidence”. Acquiring evidence in a foren-sically sound manner means that certain procedures are followed and documented in accordance to established industry standards; it is critical that the person or persons acquiring and searching the evidence are properly trained and certified in these procedures. There are several certifications to be had, most of which are hardware and/or software specific. One of the certifications that is hardware and software independent is the Certified Computer Examiner (CCE), sanctioned by the International Society of Forensic Computer Examiners (ISPCE); this body also trains and certifies many of the law enforcement agencies around the globe. In the State of Texas, according to the Texas Occupations Code, Sections 1702.101 and 1702.104
“Unless the person holds a license as an investigations company, a person may not:
...engage in the business of securing, or accepts employment to secure, evidence for use before a court...” There are certain exemptions to this according to Texas Occupations Code Section 1702.324
(1) A licensed attorney while engaged in the practice of law; (and by extension, a direct employee of a licensed attorney, engaged in the practice of law, working under their direction;)
(2) A Certified Public Accountant (CPA); or
(3) A Licensed Private Investigator.
What this says is that in the State of Texas, you may have invented computer forensics and followed every procedure, dotted every “i” and crossed every “t”, but if you are not in one of the categories mentioned above, there is a chance that the evidence found could be tossed out. It may seem a
|
minor point, but it is the law, and motions have been filed to exclude evidence that was gathered by a computer forensics expert who was not also a licensed private investigator.
So, as you deal with evidence located on hard drives, CDs, cell phones, digital cameras, whatever, make sure that you are doing so in a forensically sound manner in order to have admissible evidence.
1. Working From the Original Media
While this may seem like common sense, we have seen instances where backups or clones of the original media were not made, and the files were corrupted, damaged or lost. Further, as you access files, the metadata on those files change, potentially tainting or spoliating the evidence. There is no “Undo” button for this; if the digital evidence is not properly acquired in the beginning, it can ruin the entire E-Discovery.
Extra Credit – Waiting
Every moment you wait, potential evidence is over-written, destroyed or just lost. People are becoming more and more sophisticated in hiding digital information and evidence; the longer you wait, the more likely valuable information may be lost.
The usage of E-Discovery can save you and your clients a great deal of time and money. By understanding and embracing the new federal rules, you can set yourself up to have a strong competitive advantage. So, avoid the common mistakes in this article and be sure to hug your “propeller-head” the next time you see him (or her); they may save your next case.
Mr. Wells is a Certified Computer Examiner (CCE), Texas Licensed Private Investigator and CT Summation Certified Trainer. Prior to joining Litigation Solution, Inc., he was an Owner and Partner at CUW LitSupport, a company specializing in training legal professionals in litigation support software, including CT Summation, Trial Director and Sanction. Previous to CUW LitSupport, Mr. Wells spent 23 years with AT&T, Lucent Technologies and Avaya, specializing in selling to and consulting with clients and their voice and data communications and networking needs.
|
|
|
Texas Paralegal Journal © Copyright 2007 by the Paralegal Division, State Bar of Texas.
Top of Page
|
|
|
