aira journal journal news from the ... we have a truly exceptional program lined up at the j.w....

AIRA JournalNews from the Association of Insolvency and Restructuring Advisors Volume 22, Number 1 April/May 2008

In this issue:

• AIRA Scholar in Residence

• Revenue Based

Turnarounds: Seven Steps

to Get the Needed Results

• Taxation Cases

• Bankruptcy Cases

• Club 10

Brokers continued on p. 20

When Brokers Go Broke: Subprime Meltdown May Mean More

Stockbroker Bankruptcies

Charles M. Oellermann and Mark G. Douglas

By almost every estimate, the fallout from the sub-prime mortgage/investment disaster has proven to be worse than anticipated, numbering among its casualties over 50 mortgage lenders as well as venerable 85-year old Wall Street icon Bear Stearns Cos., Inc. Once the fifth largest securities firm in the U.S., Bear Stearns provisionally agreed to be acquired by J.P. Morgan Chase & Co. (with up to $30 billion in Federal Reserve emergency financing) on March 24, 2008 at the bargain basement price of $1.2 billion, or $10 per share, only a week after expressing outrage at J.P. Morgan’s initial offer of only $240 million ($2 per share) and ten days after its market value had been pegged at $4.1 billion.

There was a good deal of speculation as Bear Stearns’ affairs unraveled at lightning speed that the company might seek bankruptcy protection in a effort to stave off billions of dollars in margin calls. However, although Bear Stearns is a global investment banking firm, a significant percentage of its business involves prime brokerage clearing services to hedge funds and other investors. It is, in fact, the third-largest prime brokerage firm in the U.S., behind Goldman Sachs Group Inc. and Morgan Stanley.

To the extent that Bear Stearns’ respective business entities are considered “stockbrokers” (defined generally to include any securities broker), those entities would be ineligible for relief under chapter 11 of the Bankruptcy Code. As a result, the alternative would be liquidation under either chapter 7 or the Securities Investor Protection Act of 1970 (“SIPA”). The potentially

disastrous consequences of liquidating Bear Stearns’ brokerage assets for customers and creditors (including trade counterparties to credit default swap contracts carrying an outstanding value of over $2.5 trillion), as well as the inability to stay the liquidation of many of those contracts even if a bankruptcy were filed, provided the principal impetus for the Federal Reserve’s decision to provide emergency loans backing the J.P. Morgan acquisition/bailout.

An increasing number of broker/dealers will be forced to consider their options, as the inevitable onslaught of litigation and federal investigations ensue regarding the sub-prime investment scandal. Creditors and customers of U.S. broker-dealers will similarly be keenly interested in the likely ramifications of a broker’s meltdown. In anticipation of those concerns, a short primer on stockbroker liquidation proceedings may be instructive.

Federal Regulation of Stockbrokers

As a consequence of the financial mayhem that precipitated the Great Depression, the securities industry is among the most heavily regulated sectors in the U.S., with the Securities and Exchange Commission (“SEC”) presiding over enforcement of the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “1934 Act”). Those statutes were designed to restore investor confidence in U.S. capital markets by providing investors with more reliable information and clear rules of honest dealing. The SEC’s enforcement mandate includes the obligation to regulate securities brokers, transfer agents and clearing

� April/May 2008 Vol. 22 No. 1 AIRA Journal

Dear AIRA Members:

Are you ready to take a chance on AIRA’s 24th Annual Bankruptcy and Restructuring Conference in Las Vegas? I bet you are. Odds are you won’t be disappointed, because

we have a truly exceptional program lined up at the J.W. Marriott on June 4-7.

Las Vegas provides the perfect setting to combine the excellent learning opportunities for which AIRA is known with lots of enjoyable social and networking activities for all participants. It’s fitting that our first conference in this unique destination would be unique in its own right – where else would you find a program with five keynote speakers? Or a “conference within a conference” offering a separate track of sessions geared to practitioners who work with small and middle market clients?

The conference officially kicks off with an opening reception on Wednesday, June 4 at 6:30 pm. The schedule of panel sessions runs Thursday and Saturday mornings and all day on Friday. Our Annual Dinner and Awards Ceremony will be on Thursday night, with further opportunities to socialize with food and drink at pre- and post-dinner events. Mike Policano, a restructuring industry pioneer and leader is sure to provide an interesting perspective as our featured speaker during the dinner.

As in the past, there will also be a full day of concurrent sessions before the official start of the conference. Programs on bankruptcy taxation and commercial bankruptcy will be conducted on Wednesday, June 4. CIRA Part I is also being offered for three days pre-conference starting on Monday, June 2. There is no shortage of social activities planned for attendees and their guests, ranging from golf on a magnificent course to Cirque de Soleil to a gourmet cooking class to sightseeing. And I hear that there might be just a few other things to do in this particular town …

Further information and registration materials can be found on our website at www.aira.org. Register soon, as this conference is already proving to be our most popular one ever. And then please rest up so you are ready for this content-rich and fun-filled “event of the year.” I look forward to seeing you there!

Warm regards,

Alan D. HoltzPresident

In This Issue

When Brokers Go Broke: Subprime

Meltdown May Mean More Stockbroker

Bankruptcies

Charles M. Oellermann &

Mark G. Douglas 1

Executive Director’s Column

Grant W. Newton, CIRA 4

AIRA Scholar in Residence

Professor Jack F. Williams, CIRA, CDBV 5

Revenue Based Turnarounds: Seven Steps

to Get the Needed Results

Miles Stover, CIRA, CTP 9

Taxation Cases

Forrest Lewis 11

Bankruptcy Cases

Baxter Dunaway 13

Members on the Move 23

Club 10 23

Alan Holtz is a Managing Director with AlixPartners based in New York. He has spent close to 20 years as a corporate restructuring and reorganization specialist and has managed all aspects of the financial restructuring process. Alan has provided services to companies, management teams and boards of directors, as well as to financial institutions and creditors’ committees, across a wide variety of industries. A frequent speaker on the subject of bankruptcy and reorganization, Alan holds a bachelor’s degree in economics from the Wharton School of Business at the University of Pennsylvania, and is a CPA, CIRA, and recipient of the 1992 silver medal from AIRA.

Letter from the President

AIRA Journal is published six times a year by the Association of Insolvency and Restructuring Advisors, 221 Stewart Avenue, Suite 207, Medford, OR 97501. Copyright 2008 by the Association of Insolvency and Restructuring Advisors. All rights reserved. No part of this newsletter may be reproduced in any form, by xerography or otherwise, or incorporated into any information retrieval systems, without written permission of the copyright owner.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought.

AIRA extends special thanks to these AIRA Journal contributors:

Peter Stenger - EditorBaxter Dunaway - Section EditorJack Williams - Scholar in ResidenceForrest Lewis - Section EditorMiles Stover - Section EditorStacey Schacter - Section Editor Jennifer Ginzinger - General Editor

Alan D. Holtz, CPA, CIRA

AIRA Journal Vol. 22 No. 1 April/May 2008 �

Grant Thornton’s corporate advisory

and restructuring services can help

accelerate performance and drive

value in underperforming businesses.

Our experienced financial and

operational professionals can

steer you in the right direction

to get back on course.

Passion for serving our clients, technical expertise,and partner involvement have been the hallmark of Grant Thornton LLP in the U.S. for more than 80 years. Plus, you get the benefit of Grant Thornton International member firms in 112 countries around the world. Call us today orvisit www.GrantThornton.com/CARS. Find outhow it feels to work with people who love whatthey do!

Audit • Tax • Advisory

www.GrantThornton.com

Loretta [email protected]

Marti KopaczNew [email protected]

Mark ToneyNew [email protected]


Executive Director’s ColumnGrant W. Newton, CIRA

AIRA’s 24 Annual Bankruptcy and Restructuring Conference is scheduled for June 4-6 in Las Vegas. This year’s conference will offer two new features:

1. A special track for members that service the small and middle markets. Registration for this track is very strong. Topics covered vary from the challenges of growing your practice to valuing “Joe’s Texaco” as opposed to “Texaco”.

2. Five separate presentations focusing on distressed investing, capital markets, global markets, business landscape ahead, and dealing with operational and financial challenges facing domestic companies. Following these presentations will be a roundtable discussion by leading professionals who will challenge and debate the assumptions, presumptions and logic of the forecasts presented by the five experts.

Tool Box for Practitioners

If you are new to the profession or need a review of the basics consider attending the preconference session (Wednesday) on a case study of the life of a corporate debtor in chapter 11—from filing to confirmation. This is another tool box program designed by Matt Schwartz, CIRA.

Bankruptcy Taxation

Also on Wednesday, Jay Crom, CIRA, will take over from Dennis Bean, CIRA (Dennis will still be a speaker) as the moderator of the Bankruptcy Taxation seminar. Dennis has worked on this tax session for over 15 years. Dennis, we wish to thank you for the many great tax sessions you have provided for AIRA. Jay, welcome! And we hope you find your involvement to be gratifying. Assisting Jay in developing this year’s program was Kathy Klein, Elizabeth Berry, CIRA, and Mark Wallace.

Don’t miss the event of the year—the Las Vegas conference will be exceptional for quality, variety and content of professional sessions and social events. Register today at aira.org.

AIRA.org

AIRA has acquired the domain name aira.org. The prior address—airacira.org—will continue to function. The email addresses for all of the staff have also been changed to aira.org.


Professor Jack F. Williams, CIRA, CDBV

BANKRUPTCY RETAKESLessons GLeaned From Consumer BankruptCy Cases

The consumer practice area give us some of the most difficult issues in bankruptcy practice. Difficult in their own right, many of these cases present

great opportunities to learn about bankruptcy as a system and develop themes that may be helpful in our understanding of bankruptcy law and process across all varieties of bankruptcy filings. One area where we can learn much about our bankruptcy system from what superficially appears to be a straight-up consumer bankruptcy issue if found in Section 109(h) of the Bankruptcy Code. That Section requires an individual debtor to obtain credit counseling within 180 days preceding the filing of a bankruptcy petition. The cases that represent our teaching space in this column concern the consequences of a debtor’s failure to satisfy the credit counseling requirement in Section 109(h). Although the Bankruptcy Code does recognize some exemptions, exceptions, and extensions, these indulgences are strictly limited.

When determining whether a debtor who has not complied with the specifications of Section 109 and who is seeking some form of exception, extension or exemption, the first question many courts have asked is: Is debtor eligibility a jurisdictional question? The majority of courts have determined that it is not a jurisdictional question; recasting the questions as one of whether or not a debtor is eligible is an initial question that the bankruptcy court must address.

The majority of cases conclude that the Section 109(h) counseling requirement is an eligibility and not jurisdictional issue. For example, in In re Mendez, 367 B.R. 109 (9th Cir. BAP 2007), the court held that pre-bankruptcy credit counseling is not a jurisdictional prerequisite but, instead, is a matter of individual eligibility, subject to principles of waiver and estoppel.1 Further, in Clippard v. Bass, 365 B.R. 131 (W.D. Tenn. 2007), the court held that eligibility to be a debtor is not jurisdictional, and until the bankruptcy court determines eligibility, a bankruptcy case filed by an ineligible debtor actually exists, which cannot thereafter be deemed a nullity by simply striking the case as if it never existed.

In two cases, the courts employed an extended analysis of the non-jurisdictional nature of Section 109(h) and the appropriateness of the remedy of dismissal. In the first case, In re Manalad, 360 B.R. 288 (Bankr. C.D. Cal. 2007), the court found that the credit counseling requirement was not jurisdictional in nature and did not necessarily mandate 1 See also, In re Hoshan, 2008 WL 81994 (E.D. Pa. Jan 07, 2008)(unpublished);

In re Warren, 378 B.R. 640 (N.D. Cal. 2007).

dismissal. In rejecting a per se rule, the court articulated a multifactor test for guiding its discretion. In determining whether a petition should be dismissed for failure to comply with the counseling requirements under Section 109(h), a court should consider the following factors: (1) whether debtor has a reasonable explanation for not participating in budget and credit counseling within 180 days prior to filing bankruptcy petition, (2) whether the debtor participates in budget and credit counseling once the debtor learns that it is necessary, and (3) whether it is determined, at a budget and credit counseling session, that the debtor’s debts could not have been paid outside of bankruptcy.

In the second case, In re Seaman, 340 B.R. 698 (Bankr. E.D.N.Y. 2006), the court held that eligibility issues are not jurisdictional. The court determined that the appropriate remedy for failure to obtain credit counseling was dismissal rather than striking the petition because until the eligibility is determined, the case proceeds and thus cannot be a nullity. Further, the court stated, dismissal is appropriate because “[d]ismissal is the result in nearly all of the cases filed by petitioners who are ineligible under other subsections of Section 109.”2

In contrast, in In re Giles, 2007 WL 259920 (Bankr. D. Utah 2007), the court held that it lacked jurisdiction over the debtor’s case, where the debtor failed to comply with the credit counseling requirement imposed by Section 109(h). Moreover, in In re Valdez, 335 B.R. 801 (Bankr. S.D. Fla. 2005), the court held that where the petitioner was ineligible for failure to obtain credit counseling and failed to meet the standards for a waiver, the status of “debtor” was never conveyed. Finding eligibility to be jurisdictional, the court would “not consider this a dismissed case in which the individual was the debtor, for the purposes of denying the imposition of the automatic stay in subsequently filed case.”

The majority rule has the better argument. Conceptually, bankruptcy is a civil remedy. In fact, we recognize that the commencement of a case under Sections 301 and 302 constitutes an “order for relief.” We generally fail to appreciate that important distinction largely because, within our legal tradition, commercial law and business faculty teach bankruptcy classes and generally ignore the procedural themes in bankruptcy law. In contrast, in the Continental legal educational system, the civil procedure faculty often teaches bankruptcy law (and domestic relations). As a proceduralist (I teach Civil Procedure as well as Bankruptcy), I recognize the classic procedural attributes of a bankruptcy case. By procedure, I do not mean the application of

2 See also In re Dyer, 381 B.R. 200 (Bankr. W.D.N.C. 2007)(“Credit counseling” requirement imposed on debtors seeking to file for bankruptcy is not jurisdictional); Warren v. Wirum, 378 B.R. 640 (N.D. Cal. 2007)(Prepetition credit counseling requirement is not jurisdictional).

AIRA Scholar in Residence


the Bankruptcy Rules of Procedure to bankruptcy cases, an obvious procedural aspect of bankruptcy practice; rather, by procedure I mean that core fundamental concepts of what we would otherwise label as substantive bankruptcy law embedded in the Bankruptcy Code are in fact procedural attributes. Among these, and I believe central to an understanding of bankruptcy in general, and the particular jurisdictional issue in particular, is the notion that historically, bankruptcy was a special application of the federal interpleader civil action. The debtor commences a bankruptcy case (the equivalent to the interpleader complaint commencing a federal civil action); an estate comprised of all his assets unless statutorily excluded or actually exempted by the debtor is created (the corpus or res deposited into the registry of the court in an interpleader action); creditors or equity assert claims and interests against the estate (the universe of claimants against the fund); upon proper notice, all those that possess a claim or interest must assert it or may be barred from further recovery (nationwide service of process and the discharge); the automatic stay protects the estate, the debtor, and property of the debtor from virtually all debt collection actions of interest (the bar of taking legal action against assets that are in custodio legis); and the discharge is granted (no further liability of the innocent stakeholder once the interpleader action is commenced and funds paid into the registry of the court).

With that procedural backdrop, once a debtor commences a bankruptcy case, the court has jurisdiction if the requirements of 28 U.S.C. §1334 are met. Among other things, Section 1334 provides that “the district courts shall have original and exclusive jurisdiction over all cases under title 11.” 28 U.S.C. §1334(a). The better view is that title 11 (the Bankruptcy Code) does not add or subtract from district court jurisdiction over bankruptcy cases as established in 28 U.S.C. §1334. Thus, the failure to comply with debtor

eligibility requirements embedded in the Bankruptcy Code is tantamount to the Plaintiff who commenced a civil action in federal district court and failed to state a claim upon which relief may be granted, resulting in a Federal Rule of Civil Procedure Rule 12(b)(6) dismissal upon proper motion.

This presents the question of what does a bankruptcy court do with a case filed by an ineligible debtor. Some courts say strike the petition; others say dismiss the case. The Southern District of Texas, in Wyttenbach v. C.I.R.3 determined that the appropriate remedy was to strike the petition because no case was validly commenced. There, the court held that striking the petition and retroactively annulling the automatic stay was a permissible remedy for an individual’s noncompliance with the credit counseling requirement. Likewise, in In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 2005), because the court determined that the debtors were ineligible, and thus no case was commenced, the court found that the appropriate remedy for their ineligibility was to strike their petitions rather than dismiss their cases. Other courts, however, have found that when the petition is filed, the case is commenced and thus, the remedy requires dismissal for cause.

At first blush, this would seem to be a distinction without a difference. However, if the case is dismissed for cause rather than the petition simply struck as void ab initio, the debtor’s protection from the automatic stay is limited by Section 362(c)(3). That provision, as revised by BAPCPA the 2005 Amendments), renders a petition filed within one year of the dismissal of another bankruptcy case, presumptively filed in bad faith and, thus, limits the automatic stay to 30 days.4 This new provision is triggered by the dismissal, and not striking, of a petition. Although this presumption can be rebutted, it is not the way a debtor seeks to begin a bankruptcy case.

3 382 B.R. 726 (S.D. Tex. Mar 05, 2008)4 11 U.S.C. § 362(c)(3)(A)

In In re Cannon, 376 B.R. 847 (Bankr. M.D. Tenn. 2006), the court found that the dismissal of a Chapter 13 case, as opposed to striking of the bankruptcy petition, was the appropriate outcome where individuals were ineligible to be debtors due to their failure to have obtained the requisite prepetition credit counseling. In contrast, in In Re Elmendorf, 345 B.R. 486 (Bankr. .S.D.N.Y. 2006), the court concluded that dismissal for cause pursuant to Section 707(a) is not always the appropriate disposition of a petition that has been filed by a debtor ineligible for bankruptcy relief pursuant to Section 109(h), and that the “court may choose to strike or dismiss a petition in view of the particular circumstances sub juidice in the exercise of its equitable powers pursuant to §105(a) to carry out Congressional intent that individuals receive credit counseling before filing for bankruptcy relief.” Interestingly, in In re Thompson, 344 B.R. 899 (Bankr. S.D. Ind. 2006), the court held that when a putative debtor who filed a bankruptcy petition is ineligible because he did not comply with Section 109(h)’s credit counseling requirements, the proper remedy was to strike the petition, not to dismiss the case. The court further found that the filing of a petition by an ineligible debtor triggers the automatic stay, even though no “case” has been commenced. The opinion was subsequently vacated as moot on other grounds. See 249 Fed. Appx. 475 (7th Cir. 2007).

In In re Rios, 336 B.R. 177 (Bankr. S.D.N.Y. 2005), the court found that the putative debtor, who neither sought prepetition credit counseling nor made the appropriate certification to the court evidencing eligibility for an exemption from the credit counseling requirement, never properly commenced a case and, thus, the petition would be stricken, as opposed to dismissed. Finally, in a perplexing case from a proceduralist perspective, in Adams v. Finlay, 2006 WL 3240522 (S.D.N.Y. Nov 03, 2006)(unpublished), the district court found that the

Retakes continued


bankruptcy judge acted within her judicial power when striking a petition where the debtor failed to obtain credit counseling prior to filing. “Failure to receive counseling in compliance with the statute is not jurisdictional, rather it goes to whether the petition states a claim upon which relief can be granted.” Therefore, according to the court, striking the petition rather than dismissal was a proper remedy.

From a proceduralist perspective, the better argument is that where a debtor proves ineligible for failing to comply with the educational requirements under Section 109(h), the proper remedy is a dismissal of the bankruptcy case and not the striking of the petition. The district court, in In re Mason, 2007 WL 433077 (E.D. Ky. 2007), captures the better view. In that case, the district court overturned the bankruptcy court’s decision to strike the petition rather than dismiss the case. The district court found that the bankruptcy court had exceeded its jurisdiction under Section 105 by striking the petition. The district court found that “there is no support for the remedy of striking a debtor’s petition in the Bankruptcy Code. On the other hand, the dismissal remedy is explicitly set forth in section 707 and is not limited to the conditions enumerated in that section.” Likewise, in In re Dyer, 381 B.R. 200 (Bankr. W.D.N.C. 2007), the court held that the petition filed by a debtor who, due to lack of prepetition credit counseling, is not eligible to be bankruptcy debtor, is not a legal nullity which has to be stricken, but rather is subject to being dismissed. Additionally, in In re Enloe, 373 B.R. 123 (Bankr. D. Colo. 2007), the court observed that the mere fact that the debtors, as a result of their attorney’s error, did not file for chapter 7 relief until 189 days after they received credit counseling did not warrant dismissal of case. According to the court, the credit counseling requirement is not jurisdictional, and until the bankruptcy court determines a debtor’s eligibility, the bankruptcy

case actually exists, which cannot thereafter be deemed a nullity simply by striking the case. In In re Falcone, 370 B.R. 462 (Bankr. Mass. 2007), the court held that the appropriate remedy for failing to comply with the Section 109(h) counseling requirement was an order dismissing, rather than striking as void ab initio, the debtor’s Chapter 13 case.5

Although I have addressed a bankruptcy consumer issue, the lessons learned transcend consumer bankruptcy cases and teach us much about the bankruptcy system in general. Recognizing the procedural foundation of substantive bankruptcy law helps us understand perplexing bankruptcy issues in their proper historical and conceptual context. As promised, consumer bankruptcy cases can teach business bankruptcy practitioners many lessons, if but would they only listen.

5 See also In re Swiatkowski, 356 B.R. 581 (Bankr. E.D.N.Y. 2006)(“The law is clear that, with limited exceptions, a debtor must obtain credit counseling prior to filing in order to be eligible to file a petition in bankruptcy” and “the Court declines to follow that line of cases which ‘strike’ rather than dismiss petitions.”); In re Wilson, 346 B.R. 59 (Bankr. N.D. N.Y. Jun 05, 2006)(appropriate disposition, upon determination by bankruptcy court that debtors had not satisfied prepetition credit counseling requirement and were not entitled to extension based on exigent circumstances, was to dismiss, not strike, bankruptcy case.); In re Tomco, 339 B.R. 145 (Bankr. W.D. Pa. 2006)(“Cause” for dismissal of a bankruptcy case is not limited to the enumerated statutory list(s). Debtor’s ineligibility for bankruptcy relief constitutes one “cause” for dismissal of the case. Further, she was ineligible to be a debtor, the proper remedy was for the bankruptcy court to dismiss the case, as opposed to striking the petition as void ab initio.); In re Wallace, 338 B.R. 399 (Bankr. E.D. Ark. 2006)(chapter 13 debtor’s failure to seek or obtain credit counseling prior to filing her bankruptcy petition, and failure to provide any certificate of exigent circumstances, in violation of credit counseling requirement of BAPCPA, rendered her ineligible for bankruptcy relief and necessitated dismissal of petition, though debtor testified that she was never advised, and was unaware of need, of obtaining such credit counseling, and though counseling was obtained seven days after petition date.); In re Dillard, 2006 WL 3658485 (Bankr. M.D. Ga. Dec 11, 2006)(unpublished)(the appropriate method for dealing with the case of an ineligible debtor is the dismissal of the case because “the eligibility question is not jurisdictional and does not prevent an ineligible debtor from commencing a case and having that case dismissed.”).

New York, NY

Part 1: July 21-23, 2008

Part 2: October 20-22, 2008

Part 3: December 8-10, 2008

Washington, DC

Part 1: May 5-7, 2008

Part 2: July 23-25, 2008

Las Vegas, NV

Part 1: June 2-4, 2008

Miami, FL

Part 3: May 19-21, 2008

Malibu, CA

Part 2: August 11-13, 2008

Part 3: November 12-14, 2008

Dallas, TX


Part 3: January 26-28, 2009

CIRA CoURSE DATES

Register now for the following

CIRA Courses:

Visit www.aira.org for complete course content and easy, online registration


Cutting costs by two percent or ten percent is easy. In fact, it’s easy to cut costs by one hundred percent. It’s probably not a wise idea, but it is easy.

Increasing revenue can also be easy…with a plan and some rules. And increasing revenue is always a wise idea.

If you are in a crisis or severely under-performing situation and you want to open up as many possibilities as there can be for a successful turnaround, focusing on increasing revenue makes sense. Increasing revenue by ten percent is always preferable to cutting costs by ten percent. Let’s discuss why and learn how to do it!

Turnaround professionals are comfortable working with balance sheets and general ledgers. There are several financial moves that are quick to implement and do result in identifiable improvement. Revenue improvements are much less straight forward.

For the sake of this article and assuming the reader, at least temporarily, buys into focusing on revenue improvements as the best way out of the crisis, where should the turnaround professional initially focus? New product development, service policies, sales force goals, terms or pricing?

If pricing is selected as the primary focus, should you cut prices and hope that volume follows, leave the pricing at current levels, or raise pricing and hope volume does not leave? This is a major decision with major impact on what will be done next. (Hint. Raising prices is always the first alternative to explore.)

Turnaround professionals typically have accounting, financial or operational backgrounds and can quickly see cost cutting opportunities. Yet experience tells us that there may be costs incurred to support revenue generating measures. But spending money doesn’t always involve an expense. Spending money could and should involve an investment. Cutting costs without knowing what the revenue side of the equation is and needs to be can be very expensive. With a few rules in mind and a structure to begin some initiatives, you can get things moving in the right direction quickly. “Quickly” is important.

Informing the staff that the focus will be on identifying opportunities to increase revenue creates a much more exciting and positive environment for the people who have to make it work, and you need to implement the ideas you are backing. The personnel talent you’ll need to get the job done is much less likely to leave when they know that cost cutting is not the method you have selected to get profitability to where it needs to be. We know there will be probably be some current staff that will need to be terminated, but we want you to have the opportunity to make that decision. The best people have options. You need some options too.

THE STEPS To INCREASE REVENUE

Step one. Find out which customers are the best, most profitable customers.

Experience tells us that asking the Sales management who their best customers are will get you a list of the customers with the highest level of sales on top. Ask the same managers if the list would look the same if the highest volume customer requires four extra staff members to prepare the reports they want, are very slow payers, and they return 2% of what you sell them for no reason. Let’s hope they would modify the list. You as the Leader need to define what traits have value and are important to the turnaround effort.

Evaluate every customer for their value to the organization at this time in the organizations’ history. Know which customers cost you money. Know what every customer buys, and what products you offer for sale and shouldn’t offer for sale. This will be very useful information very soon.

Step Two. Gather a team that can produce a definitive report on revenue generation opportunities within four weeks. (Four weeks is usually enough time to do the job right and not so much time that the team gets comfortable. If there are one or two items that need longer to come to a position on, okay. But after four weeks there will be several opportunities that might be able to be implemented and not have to be held back for weeks waiting for the one or two other situations to be resolved.)

This project needs to include visits to the customers – current, past and potential. Don’t be guilty of creating a program that bets the future of your clients from the perspective of a conference room only.

The opportunities will need to have the costs associated with them identified and the opportunities should be able to generate profitable revenue within six months. (If the level of crisis will not allow this time horizon, define the revenue time constraints appropriately.) Do not consider placing any project on the “A List”if it’s going to take more than six months to realize real returns.

Step Three. Take the list of potential initiatives and trim it down to a list that is manageable. Evaluate which projects have the quickest return, the largest return, require funding that is attainable, have the highest probability of success, which ones have the highest need of assistance from outside parties, are most consistent with the branding efforts of the past if they are going to be perpetuated, and every other logical selection criteria. Realize that long-term marketing research and other analytical efforts won’t be able to be conducted in this short period of time. Use the best indicators you have including your gut. Get a list together, but one that can be executed.

REVENUE BASED TURNARoUNDS: SEVEN STEPS To GET THE NEEDED RESULTS

Miles Stover, CIRA, CTP

10 April/May 2008 Vol. 22 No. 1 AIRA Journal

Step Four. Get started! While the “A List” projects are being developed, get out of your office and get immersed in every aspect of the company. The best way to learn the business is jumping into the fray. Learn what programs might have already been positioned to be closed down without your knowledge – before you came on board. Learn what staff might be targeted to be released. You are the turnaround professional, the Leader, so every personnel change needs sign-off, especially now.

Getting started also reinforces the sense of urgency needed by the troops. Turnarounds are not supposed to be fun – they are serious business. Everyone needs to know that. You want everyone to enjoy what they are doing, but the fun will probably have to wait until you see some results from their efforts.

Step Five. Identify why the company is in trouble. If you don’t already know, assume that there is a history of jumping from one emergency to another. Find out which firedrills have become routine course of business and stop them now. Don’t let the habits of the past hinder the probability of success in the future. Talk to the staff – they know.

The key here is to understand that you are going to need buy-in on the projects that are going to be undertaken. The key here is for the staff to know that the jumping from project to project won’t be allowed anymore - or whatever was identified as the problem in the past. These projects, your projects, will be structured; will have firm goals and specific benchmarks. Put the past in the past.

The need for strict, well defined goals also serves as a method to identify projects that in fact aren’t going to meet the established criteria quickly enough so the funds and energy being expended can be redirected. Everyone on the team needs to know what progress is or isn’t being made. It is better to admit a mistake after 45 days than admit a failure after six months.

Step Six. Establish priorities. Turnarounds happen when every area needing attention has attention paid to it. But everything cannot have attention paid to it at once and some areas have

a higher priority of need. Revenue turnarounds seem to have especially long lists of things to do attached to them. This makes prioritization more important.

Whatever method you use for evaluating and prioritizing projects, there needs to be a relationship between the amount of time you take analyzing it and the expected return. Use the matrixes you are most comfortable with, but be sure the projects are assessed according to payoff, probability of the expected payoff while being confident that the resources needed for the payoff are available.

Step Seven. Remember what you are trying to do – everyday, every hour. What is the best use of your time right now?

The turnaround effort is supposed to free up cash, cut costs and generate profitable growth. While it is probably more comfortable for most turnaround professionals to focus on cutting costs at the beginning of an engagement, focusing initially on increasing profitable revenue is a better use of your limited time. Revenue growth programs can be managed like cost reduction programs, but have a larger potential payback.

A goal of this short article is to change the typical mindset of the turnaround professional. When you run the numbers you will see that a ten percent increase in gross margin allows you to lose a large percentage, usually more than twenty percent, of top line revenue with the same or better bottom line results. It is the bottom line that matters.

A lot of work goes into a successful turnaround. Work at the right thing. And the right thing is usually increasing revenue. Try it. You will like the results.

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Washington, DC: July 23-25, 2008

Malibu, CA: August 11-13, 2008

New York, NY: October 20-22, 2008

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Malibu, CA: May 12-15, 2008

New York, NY: September 15-18, 2008

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Malibu, CA: August 18-21, 2008

New York, NY: November 17-20, 2008

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AIRA Journal Vol. 22 No. 1 April/May 2008 11

Taxation CasesForrest Lewis

TRUSTEE CAN’T RECoVER ESTIMATED TAX PAYMENT FRoM IRS AS A PREFERENCE

The U.S. Bankruptcy Court for the District of Kansas denied a trustee’s motion to make

a compromise in lieu of filing a preference action against the Internal Revenue Service in a dispute over a $22,250 estimated tax payment. (In re Middendorf, Bankr. D. Kan., No. 05-21748, 2/1/08).

Debtors Robert and Michelle Middendorf filed for bankruptcy on April 19, 2005. Christopher Redmond was appointed the trustee. The debtors liquidated approximately $112,000 in stocks, resulting in capital gains of $69,765. On March 21, 2005, debtors had $97,627.74 in their bank account. Between March 21 and the petition date of April 19, debtors made multiple payments which resulted in an account balance of $130.15 on the petition date. Eight days before filing for bankruptcy, the debtors paid the IRS $22,250 as an estimated prepayment for 2005 federal taxes on the capital gains realized by the stock sales. In April 2006, the debtors filed a joint federal income tax return. With a wage withholding and prepayment, debtors were entitled to a $20,940 refund. On March 6, 2006, the trustee demanded that the IRS turn over the entire $22,250 tax prepayment as a preferential transfer avoidable by the trustee even though turning over the entire payment would create a $1,310 tax debt. The trustee and the IRS entered into a stipulation and agreement under certain conditions. The debtors objected to the turnover.

The court said the estimated tax prepayment was not a preferential transfer and that the prepayment was not a transfer on account of an antecedent debt and therefore the trustee had no claim to settle with the IRS. The court examined the requirements to sustain a claim and found that the trustee did not make a case on any one the three elements: (1) the transfer was made with the actual intent to hinder, delay, or defraud existing or future creditors; (2) the transfer was made for less than reasonably equivalent value while the debtor was insolvent; or (3) the transfer was made to an insider.

Through a very detailed analysis, the court found that the portion of the debtors’ tax refund attributable to prepetition withholdings and payments was estate property. Though the debtors made a large estimated tax payment prepetition, the estate is entitled to the portion of the tax refund attributable to the overpayment made prepetition. The court ordered that the debtors should receive $5,056, the estate should receive $15,884, and that the IRS should receive $1,310 in full satisfaction of the debtors’ 2005 tax liability.

[Commentary: it seems improbable that a bankruptcy court would sustain a preference action against the IRS and the court went to great lengths to avoid ordering IRS to turn over the estimated tax to the Trustee].

MoRE DETAILS EMERGE oN MoRTGAGE DEBT FoRGIVENESS

The Internal Revenue Service has revised Form 982 and requires taxpayers who take advantage of the new mortgage debt relief law to report it on Form 982. The revised form is dated February, 2008. The new law applies to mortgage debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. Under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).

The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision.

The new provision contains ordering rules in cases of overlap with other Sec. 108 situations. If the taxpayer is in bankruptcy, the exclusion under 108(a)(1)(A) for Title 11 cases applies. If the taxpayer is insolvent but not in bankruptcy, generally the new provision applies unless the taxpayer elects the insolvency exception of 108(a)(1)(B). Also, amounts which do not qualify for the mortgage debt exclusion may qualify for the insolvency exception or other applicable 108 exception.

Under the new provision the tax basis of the residence must be reduced by the amount of the excluded debt. Presumably one case in which a taxpayer might want to elect the insolvency exception instead of the mortgage debt exclusion would be when the taxpayer wanted to maintain his basis in the residence and has net operating losses or other tax attributes which he would rather forgo. This would be a rare case, indeed.

Continued on next page

1� April/May 2008 Vol. 22 No. 1 AIRA Journal

IRS HAS TURNED 180 DEGREES oN NET oPERATING LoSSES oF CoNSoLIDATED GRoUPSAn important issue in consolidated groups where one member receives a discharge of debt in bankruptcy while other members of the group survive is the scope of the reduction of tax attributes as a result of the discharge. Under Section 108 when there is a discharge of debt of a corporation and the income is excluded for tax purposes, favorable tax attributes such as net operating loss carryovers must be reduced to the extent of the income exclusion. The reduction takes place at the beginning of the tax year after the year of discharge. Back in 1991 the IRS ruled in PLR 9121017 that the reduction of attributes was limited to those of the discharged corporation. If the amount of discharged debt exceeded the tax attributes of the discharged corporation, there was no adverse effect on the tax attributes of other group members. That is, it did not affect the consolidated net operating loss carryover, etc.

In 1999 the IRS began to reverse its position culminating in the promulgation of Regulation 1.1502-28 in 2004. That regulation provides that excluded cancellation of debt income that exceeds the tax attributes of the member receiving the discharge reduces the tax attributes of other members of the group. This is true both for Title 11

discharges under 108(a)(1)(A) and insolvency discharges outside of bankruptcy under 108(a)(1)(B).

Example: P is the parent of S1, S2 and S3. In Year 1 each corporation incurs a $100 net operating loss and the total consolidated NOL carryover at the end of Year 1 is $400. In Year 2 all corporations have zero taxable income and S1 is discharged of $140 which qualifies for exclusion from taxable income under Sec. 108. In Year 3 the $100 NOL carryover of S1 is first reduced to zero. Then, the remaining $40 reduces the consolidated NOL carryover.

The regulations contain ordering rules for the sequence in which tax attributes are reduced. Generally, current year tax attributes are reduced first, then carryovers beginning with the earliest year. The rules also provide for apportionment of the reduction among the group members. They also permit the election to reduce basis in depreciable assets and basis in subsidiary stock. Complex rules are provided for departing group members and stopping circular basis adjustments.

Forrest Lewis, CPA is a tax practitioner based in East Lansing,

Michigan.

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Taxation continued

AIRA Journal Vol. 22 No. 1 April/May 2008 1�

Bankruptcy CasesBaxter Dunaway

Securities Law

Supreme Court

Can investors recover from secondary parties such as banks, law firms or accountants that allegedly help a corporation commit securities fraud?

Investors cannot recover from secondary parties such as banks, law firms or accountants that allegedly help a corporation commit securities fraud. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 128 S.Ct. 761, 76 USLW 4039, Fed. Sec. L. Rep. P 94,556, 08 Cal. Daily Op. Serv. 559, 2008 Daily Journal D.A.R. 569 (U.S., Jan 15, 2008) (NO. 06-43).

In Stoneridge, the Supreme Court rejected investors alleging corporate fraud in a 5-3 ruling that curbs the ability of shareholders to recover from “secondary” parties - such as investment banks, vendors and accountants - accused of hiding corporate wrongdoing. Stoneridge centered on an investor lawsuit seeking shared liability against suppliers of one of the largest cable TV operators. Equipment vendors Scientific-Atlanta and Motorola were accused of engaging in efforts to help Charter Communications artificially inflate financial statements in order to bolster its stock’s price. The deal involved an alleged “sham” transaction that generated some $17 million in phony revenues from the supposed sale of TV set-top boxes. In the majority opinion, Justice Anthony Kennedy said Charter investors could not “rely” on any deceptive statements made by Charter’s suppliers to link liability to them.1

The outcome in Stoneridge led to the denial of certiorari by the Supreme Court on a separate lawsuit filed against onetime energy giant Enron. See Regents of the University of California v. Merrill Lynch (06-1341), reported below. In Regents, company investors sought $30 billion from accounting firms and banks accused of helping that company deceive shareholders over hidden debts.

The Syllabus of the Stoneridge case is as follows:

Alleging losses after purchasing Charter Communications, Inc., common stock, petitioner filed suit against respondents and others under § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5. Acting as Charter’s customers and suppliers, respondents had agreed to arrangements that allowed Charter to mislead its auditor and issue a misleading financial statement affecting its stock price, but they had no role in preparing or disseminating the financial statement. Affirming the District Court’s dismissal of respondents, the Eighth Circuit ruled that the allegations did not show that respondents made misstatements relied upon by the public or violated a duty to disclose. The court observed that, at most, respondents had aided and abetted

1 See Bill Mears, High Court Curbs Investor Lawsuits, CNNMoney.com, Jan. 15, 2008, 13 Andrews’ Bank & Lender Liab. Litig. Rep. 3, Supreme Court Refuses to Expand Liability for Securities Fraud (2008).

Charter’s misstatement, and noted that the private cause of action this Court has found implied in § 10(b) and Rule 10b-5, Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 13, n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128, does not extend to aiding and abetting a § 10(b) violation, see Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164, 191, 114 S.Ct. 1439, 128 L.Ed.2d 119.

Held: The § 10(b) private right of action does not reach respondents because Charter investors did not rely upon respondents’ statements or representations. Pp. 767 - 774.

(a) Although Central Bank prompted calls for creation of an express cause of action for aiding and abetting, Congress did not follow this course. Instead, in § 104 of the Private Securities Litigation Reform Act of 1995 (PSLRA), it directed the SEC to prosecute aiders and abettors. Thus, the § 10(b) private right of action does not extend to aiders and abettors. Because the conduct of a secondary actor must therefore satisfy each of the elements or preconditions for § 10(b) liability, the plaintiff must prove, as here relevant, reliance upon a material misrepresentation or omission by the defendant. Pp. 767 - 769.

(b) The Court has found a rebuttable presumption of reliance in two circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-154, 92 S.Ct. 1456, 31 L.Ed.2d 741. Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. Neither presumption applies here: Respondents had no duty to disclose; and their deceptive acts were not communicated to the investing public during the relevant times. Petitioner, as a result, cannot show reliance upon any of respondents’ actions except in an indirect chain that is too remote for liability. P. 769.

(c) Petitioner’s reference to so-called “scheme liability” does not, absent a public statement, answer the objection that petitioner did not in fact rely upon respondents’ deceptive conduct. Were the Court to adopt petitioner’s concept of reliance-i.e., that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect-the implied cause of action would reach the whole marketplace in which the issuing company does business. There is no authority for this rule. Reliance is tied to causation, leading to the inquiry whether respondents’ deceptive acts were immediate or remote to the injury. Those acts, which were not disclosed to the investing public, are too remote to satisfy the reliance requirement. It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record


the transactions as it did. The Court’s precedents counsel against petitioner’s attempt to extend the § 10(b) private cause of action beyond the securities markets into the realm of ordinary business operations, which are governed, for the most part, by state law. See, e.g., Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 71 L.Ed.2d 409. The argument that there could be a reliance finding if this were a common-law fraud action is answered by the fact that § 10(b) does not incorporate common-law fraud into federal law, see, e.g.,SEC v. Zandford, 535 U.S. 813, 820, 122 S.Ct. 1899, 153 L.Ed.2d 1, and should not be interpreted to provide a private cause of action against the entire marketplace in which the issuing company operates, cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733, n. 5, 95 S.Ct. 1917, 44 L.Ed.2d 539.Petitioner’s theory, moreover, would put an unsupportable interpretation on Congress’ specific response to Central Bank in PSLRA § 104 by, in substance, reviving the implied cause of action against most aiders and abettors and thereby undermining Congress’ determination that this class of defendants should be pursued only by the SEC. The practical consequences of such an expansion provide a further reason to reject petitioner’s approach. The extensive discovery and the potential for uncertainty and disruption in a lawsuit could allow plaintiffs with weak claims to extort settlements from innocent companies. See, e.g., Blue Chip, supra, at 740-741, 95 S.Ct. 1917. It would also expose to such risks a new class of defendants-overseas firms with no other exposure to U.S. securities laws-thereby deterring them from doing business here, raising the cost of being a publicly traded company under U.S. law, and shifting securities offerings away from domestic capital markets. Pp. 769 - 772.

(d) Upon full consideration, the history of the § 10(b) private right of action and the careful approach the Court has taken before proceeding without congressional direction provide further reasons to find no

liability here. The § 10(b) private cause of action is a judicial construct that Congress did not direct in the text of the relevant statutes. See, e.g., Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 358-359, 111 S.Ct. 2773, 115 L.Ed.2d 321. Separation of powers provides good reason for the now-settled view that an implied cause of action exists only if the underlying statute can be interpreted to disclose the intent to create one, see, e.g., Alexander v. Sandoval, 532 U.S. 275, 286-287, 121 S.Ct. 1511, 149 L.Ed.2d 517. The decision to extend the cause of action is thus for the Congress, not for this Court. This restraint is appropriate in light of the PSLRA, in which Congress ratified the implied right of action after the Court moved away from a broad willingness to imply such private rights, see, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 381-382, and n. 66, 102 S.Ct. 1825, 72 L.Ed.2d 182. It is appropriate for the Court to assume that when PSLRA § 104 was enacted, Congress accepted the § 10(b) private right as then defined but chose to extend it no further. See, e.g.,Alexander, supra, at 286-287, 121 S.Ct. 1511. Pp. 772 - 774.

443 F.3d 987, affirmed and remanded.

KENNEDY, J., delivered the opinion of the Court, in which ROBERTS, C.J., and SCALIA, THOMAS, and ALITO, JJ., joined. STEVENS, J., filed a dissenting opinion, in which SOUTER and GINSBURG, JJ., joined. BREYER, J., took no part in the consideration or decision of the case.

Supreme Court

Is a defendant who does not make or affirmatively cause to be made a fraudulent statement or omission, or who does not directly engage in manipulative securities trading practices be held liable for a securities violation under section 10(b)?

The U.S. Supreme Court on Jan. 22 dashed the hopes of defrauded Enron Corp. investors who sought to recover

billions of dollars from investment banks connected to the collapsed Houston energy firm.2

After the Stoneridge case (see above), the Supreme Court denied certiorari of the Fifth Circuit Regents case, concerning Enron. Regents of University of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, Fed. Sec. L. Rep. P 94,173, 67 Fed.R.Serv.3d 882 (5th Cir.(Tex.) Mar 19, 2007) (NO. 06-20856). Certiorari Denied by Regents of University of California v. Merrill Lynch, Pierce, Fenner & Smith, Inc., --- S.Ct. ----, 2008 WL 169504, 75 USLW 3557, 76 USLW 3018, 76 USLW 3390, 76 USLW 3392 (U.S. Jan 22, 2008) (NO. 06-1341).

The Fifth Circuit had declined to grant class certification in the securities fraud case brought against Enron’s investment banks. Regents of the University of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007). That case involved an amended motion for class certification by the lead plaintiff, who alleged that defendants engaged in deceptive conduct by their involvement in a series of transactions that allowed the company to remove liabilities and book revenue.3 The Fifth Circuit, held that “any defendant who does not make or affirmatively cause to be made a fraudulent statement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under [Section]10(b) or any subpart of Rule 10b-5.” Regents, 482 F. 3d at 387. The court also held that plaintiffs were not entitled to the Affiliated Ute presumption of reliance because it requires (1) allegations

2 Tony Mauro, Denial of Review Leaves Enron Plaintiffs Looking for Options, 1/28/2008 Tex. Law. 5 (2008).

3 Plaintiffs alleged that defendants Credit Suisse First Boston , Merrill Lynch & Company, Inc., and Barclays Bank PLC entered into partnerships and transactions that allowed Enron Corporation to take liabilities off of its books temporarily and to book revenue from the transactions when it was actually incurring debt. The common feature of these transactions is that they allowed Enron to misstate its financial condition. There is no allegation that the banks were fiduciaries of the plaintiffs, that they improperly filed financial reports on Enron’s behalf, or that they engaged in wash sales or other manipulative activities directly in the market for Enron securities.

Cases continued


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based primarily on omissions or non-disclosure and (2) demonstration that the defendants owed plaintiffs a duty of disclosure. Regents, 482 F.3d at 384.

Trey Davis, director of special projects at the University of California, said in a statement, “While the Supreme Court’s denial of the Enron investors’ petition for certiorari forecloses certification of a class action on the specific theories presented to the Fifth Circuit Court of Appeals, it does not end the Enron litigation. The Fifth Circuit ordered that the case be sent back to the District Court in Houston, Texas for further appropriate proceedings. We will be evaluating alternatives and will present them to the District Court promptly.” The suit is pending before U.S. District Judge Melinda Harmon of the Southern District of Texas.4

Bankruptcy

Ninth Circuit

Are Debtor’s prepetition taxes discharged when the bankruptcy notice sent to the taxing authority incorrectly listed the debtor’s Social Security Number?

Chapter 13 Debtor’s prepetition taxes were not discharged because the bankruptcy notice sent to the taxing authority incorrectly listed the debtor’s Social Security Number. Ellett v. Stanislaus, 506 F.3d 774, Bankr. L. Rep. P 81,043, 07 Cal. Daily Op. Serv. 12,569, 2007 Daily Journal D.A.R. 16,262 (9th Cir.(Cal.), Oct 29, 2007) (NO. 05-16677).

The petition and the § 341 notice stated the last four numbers of debtor’s social security number incorrectly. The petition and the § 341 notice did contain debtor’s correct name and address. The state taxing authority received the § 341 notice and followed its normal practice of cross-checking the name of the debtor on the notice against the social security number. The Social Security Number listed on the notice belonged to another individual who, according to the records of the taxing authority, owed no taxes. Accordingly, the taxing authority did not file a proof of claim or otherwise

4 Tony Mauro, Denial of Review Leaves Enron Plaintiffs Looking for Options, 1/28/2008 Tex. Law. 5 (2008).

participate in the case. The misstated Social Security Number violated Rule 1005, and the taxing authority received inadequate notice of the case.

Research references. Bankruptcy Service, L. Ed. §§ 17:6, 17:39, 17:46, 17:47, 17:395, 17:400; Norton Bankruptcy Law and Practice (2d ed.) § 29:2, 47:20; 8 Norton Bankr. L. & Prac. 2d 11 U.S.C. § 523. 2007 Bankruptcy Service Current Awareness Alert 9. Bankruptcy Law Manual 5d §§ 3A:8, 3A:11, 13:47. BAPCPA completely revamped § 342 to provide creditors with a method to specify where notices from the debtor or the court should be directed. These provisions do not apply to notices that may be given by the trustee, the U.S. Trustee, or creditors. There are three ways in which a creditor can direct the addressing of notices sent to it. All three are discussed in depth in Nancy C. Dreher and Joan N. Feeney, Bankruptcy Law Manual § 3A:11 (5th ed. 2003, updated June 2007). BAPCPA deleted the language “but failure of such notice to contain such information shall not invalidate the legal effect of such notice” See (11 U.S.C.A. § 342(c) (2000)).

Fifth Circuit

Does the 11 U.S.C. § 522(p)(1) homestead exemption cap of $125,000 apply to a homestead interest established within the 1,215-day period preceding the filing of the bankruptcy petition despite the fact that the debtor acquired title to the property before that statutory period?

The Fifth Circuit held that the $125,000 homestead exemption cap of 11 U.S.C. § 522(p)(1) does not apply to a homestead interest established within the 1,215-day period preceding the filing of the bankruptcy petition when the debtor acquired title to the property before that statutory period. In re Rogers, 513 F.3d 212, Bankr. L. Rep. P 81,081 (5th Cir.(Tex.), Jan 04, 2008) (NO. 06-11263).

Enacted as part of BAPCPA, 11 U.S.C. § 522(p)(1) limits the state law homestead exemption under certain circumstances. Section 522(p)(1) prevents the debtor from exempting certain interests from the bankruptcy estate if they were acquired by the debtor during the statutory period and

their aggregate value exceeds a certain dollar threshold. The statute reads, in relevant part:

[A]s a result of electing ... to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate [$125,000] in value in-real or personal property that the debtor or dependent of the debtor claims as a homestead.

Chapter 7 debtor claimed $359,000.00 state-law homestead exemption in real property which she inherited more than 1,215 days prepetition, but which she did not begin to occupy as a homestead until a time within this 1,215-day “lookback” period. Judgment creditor objected, asserting that the exemption was limited to the $125,000.00 cap established by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

Addressing a question of apparent first impression in the circuit, the Court of Appeals, held that the term “interest,” as used in the section of the Bankruptcy Code setting forth the homestead exemption cap established by the BAPCPA, refers to vested economic interests in the homestead property that a debtor acquires during the 1,215-day period preceding the filing of the bankruptcy petition, and so a homestead interest established within the statutory period, without more, does not fall within the purview of the cap. The court rejected the creditor’s argument that “interest” must be construed more broadly than title or equity and included acquiring a homestead interest. Congress meant to include only a vested economic interest in property. A homestead interest is merely a legal interest of protection against creditors in property in which the owner has a vested economic interest. A homestead interest, unlike title or equity, does not constitute a vested economic interest. The homestead exemption is valueless until it is claimed in bankruptcy.

Research References: Dunaway, The Law of Distressed Real Estate, §

Cases continued


28A:56.1; Bankruptcy Service, L. Ed. §§ 26:323, 26:325, 26:326, 26:338, 26:339; Norton Bankr. L. & Prac. 3d § 56:13; Bankruptcy Law Manual 5d §§ 5:34, 5:44.

First Circuit

Does the state crime of negligent vehicular homicide qualify as a “criminal act” which would cap a debtor’s homestead exemption to $125,000 under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) (codified at 11 U.S.C. § 522(q)(1)(B)(iv))?

Where a state court has found the debtor was criminally liable for negligent homicide, such a finding triggers the federal statutory cap on state homestead exemptions under the BAPCPA 11 U.S.C. § 522(q)(1)(B)(iv). In re Larson, 513 F.3d 325 (1st Cir.(Mass.), Jan 23, 2008) (NO. 07-1925).

Debtor Larson filed a petition for bankruptcy under Chapter 7 on October 11, 2005. On November 15, Larson claimed a homestead exemption under state law in the amount of $500,000. Howell, whose wife was killed in an accident caused by Larson, objected to the amount of the homestead exception, contending that it should be limited to $125,000 under 11 U.S.C. § 522(q)(1)(B)(iv), which caps homestead exemptions claimed under state or local law at $125,000 if “the debtor owes a debt arising from ... any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.”Howell argued that negligent vehicular homicide is a “criminal act,” and that the disposition in the criminal case triggered the cap. The circuit court rejected the argument that there is a mens rea component to the words “criminal act” as used in the statute. It did so on what it said was a plain reading of the statutory language. The statute provides that the cap applies where the debtor’s debt arises from “any criminal act, intentional tort, or willful or reckless misconduct” causing serious physical injury or death in the preceding five years. The phrase “any criminal act” is not qualified in any way by a requirement that the criminal act be intentional or willful or reckless.

Research References: Dunaway, The Law of Distressed Real Estate, § 28A:56.1; Bankr. Serv., L Ed §§ 26:834; 54:24.60; Norton Bankr. L. & Prac. 3d § 56:14; Norton Bankr. L. & Prac. 3d Fed. R. Bankr. P. 4003[Interim]; Bankruptcy Law Manual 5d § 5:34.

First Circuit

Does the debtor’s postpetition sale of his homestead, for which he had obtained a homestead exemption in the bankruptcy case, cause the proceeds of the sale to lose their exempt status?

First Circuit holds that debtor’s postpetition sale of his homestead, for which he had obtained a homestead exemption in the bankruptcy case, did not cause the proceeds of the sale to lose their exempt status. In re Cunningham, 513 F.3d 318, Bankr. L. Rep. P 81,093 (1st Cir.(Mass.), Jan 22, 2008) (NO. 06-2786).

Property that is properly exempted is immunized against liability for pre-bankruptcy debts, subject only to a few exceptions, including the following: (1) debt from certain taxes and customs duties, (2) debt related to domestic support obligations, (3) liens that cannot be avoided or voided, including tax liens, and (4) debts for a breach of fiduciary duty to a federal depository institution. 11 U.S.C.A. §§ 522, 522(c)(1)-(3). The judgment creditor’s claim that the post-petition voluntary sale of the exempt property makes the proceeds of the sale available to satisfy a nondischargeable pre-petition debt is at odds with the immunizing effect of § 522(c). Section 522(c) states: “[P]roperty exempted under this section is not liable during or after the case for any debt of the debtor that arose ... before the commencement of the case....”11 U.S.C. § 522(c)(emphasis added). By the plain language of the statute, exemptions under § 522(c) persist beyond the termination of the case, making the property subject to an exemption unavailable for the satisfaction of pre-petition debt (other than for the categories of debt noted in § 522(c) itself).

Research References: Dunaway, The Law of Distressed Real Estate, § 28A:56; Bankruptcy Service, L. Ed. §§ 26:305, 26:393 to 26:404; Norton Bankr. L.

& Prac. 3d § 56:25; Bankruptcy Law Manual 5d § 5:38.

Fifth Circuit

Does a district court have authority to modify a prior injunction sua sponte where the defendant has continued to engage in and expand upon the defendant’s vexatious litigation in several bankruptcy court cases?

Fifth Circuit rules that a district court has authority to modify a prior injunction sua sponte where the defendant has continued to engage in and expand upon the defendant’s vexatious litigation in several bankruptcy court cases but district court did abuse its discretion in extending injunction beyond federal bankruptcy courts, federal district courts, and federal agencies in the state of Texas, to filings in state court, state agencies, and the Court of Appeals for the Fifth Circuit. Baum v. Blue Moon Ventures, LLC, 513 F.3d 181, 49 Bankr.Ct.Dec. 68 (5th Cir.(Tex.), Jan 03, 2008) (NO. 06-20386, 06-20446); Fed.Rules Civ.Proc.Rule 60(b)(5), 28 U.S.C.App.(2000)(which provides that a judgment may be vacated if it is no longer equitable that the judgment should have prospective application).

The debtor Baum also argued that the modified injunction improperly stayed state court proceedings, in violation of the Anti-Injunction Act, 28 U.S.C. § 2283, and in violation of the principals set forth in Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971). However, the Court of Appeals noted that the Order clearly states that Baum voluntarily agreed to dismiss his state court claims; the district court did not order him to dismiss these cases. Because the district court’s Order did not actually stay any state court proceedings, neither the Younger abstention doctrine or the Anti-Injunction Act were implicated.

Research References: Dunaway, The Law of Distressed Real Estate. § 28:7; Bankruptcy Service, L. Ed. §§ 12:493, 12:814 to 12:819, 12:862, 28:17; Norton Bankr. L. & Prac. 3d § 58:5Bankruptcy Law Manual 5d §§ 2:5, 3A:6, 7:6; 2008 No. 3 Bankruptcy Service Current Awareness Alert 4; Fed.Rules Civ.Proc.Rule 60(b)(5), 28 U.S.C.App.(2000).


Sponsored by:AlixPartners, LLP | Alston + Bird LLP | Alvarez & Marsal | Arent Fox LLP | Bachecki Crom & Co. LLP | Bankruptcy Management Solutions | BBK | BDO Seidman, LLP

Bederson & Company LLP | Burr & Forman LLP | CRG Partners Group LLC | D.R. Payne & Associates Inc. | Dawson & Gerbic, LLP | Deloitte | Dennis Bean & CompanyDuane Morris LLP | Fennemore Craig, P.C. | FTI Consulting, Inc. | Gordon Brothers Group | Grant Thornton LLP | Greenberg Traurig LLP | Huron Consulting Group

Jones Day | Kapila & Company | Kroll Zolfo Cooper | Lefoldt & Company | Macquarie Capital (USA) Inc. | McDonald Carano Wilson LLP | Mesirow Financial Consulting LLCNavigant Capital Advisors | Perkins Coie LLP | Phelps Consulting Group | Protiviti formerly Penta Advisory Services | RSM McGladery, Inc.

Stutman, Treister & Glatt PC | Virchow, Krause and Company LLP | Weiser LLP | WilmerHale | Young Conaway Stargatt & Taylor LLP

Conference Co-Chairs

• Michael GoldStein, eSq.

• thoMaS Morrow, cira

• Michael ozawa, cira

AIRAAssociation of Insolvency & Restructuring Advisors

CIRAPart 1

June 2–4

24th AnnualBankruptcy and Restructuring Conference

June 4 - 7, 2008Las Vegas, NV

New Special Track“SMall BuSineSS –

Middle Market reStructurinGS”

TopIcs Include:• Bankruptcy Taxation• Toolbox for Practitioners: Running on Empty

- Taking a Commercial Debtor Through Chapter 11• Globalization• Accommodation Agreements: Driving for the

Checkered Flag• Credit Bidding: Stacking the Deck in Favor of

the Secured Lender/Distressed Investor

• Best Practice Issues in Operation• Roundtable Panel• Future CapitaL, Future Restructuring• “All-in” the Real Estate Market• Valuation• Getting Hired and Getting Paid: Controlling

the Risks• Ethics in Sin City: Are You Gambling With Your

Career?

don’t Miss This Year’s conference

• Richard Gibbs (Macquarie)• Steven F. Mayer (Cerberus Capital

Management, LP)• David A. Wyss (Standard & Poor’s)

• Jack Williams (Georgia State University College of Law)

• John DiDonato (Huron Consulting Group)

KeYnoTe speaKersOn Friday, June 6, five keynote speakers (a Capital Markets Banker, Buy Side Investor, Economist, Restructur-ing Professor, and Turnaround Consultant) will each make a presentation commenting upon restructuring trends, issues, and opportunities, as viewed from their respective areas of expertise. These presentations will be followed by a two hour “roundtable discussion” among restructuring experts. The “roundtable” is designed to be an open conversation/debate among the participants, which both comments upon the observations and predictions of the Keynote Speakers, and provides a forum for the experts to share their particular per-spectives on restructuring trends, issues and opportunities. The speakers are:

• Challenges of Growing Your Practice: Will You Always Be Boutique Sized?• Fun with Forensics• Fiduciary Appointments• Do’s and Don’t’s of Being an Expert Witness• Ethical Issues for Small Practitioners• Valuation

sMall BusIness–MIddle MarKeT resTrucTurIngsA new feature this year is a separate track designed for firms that work with clients in the small and middle markets. With six different sessions throughout the conference, this will provide more specific information to practitioners working on smaller cases. The topics include:


Ninth Circuit

Can a carveout that provides for a trustee’s administrative fees, but not for debtor’s counsel, be enforced?

Ninth Circuit held that carveout that provides for a trustee’s administrative fees, but not for debtor’s counsel, can be enforced. In re Cooper Commons LLC, 512 F.3d 533, 49 Bankr.Ct.Dec. 70, Bankr. L. Rep. P 81,083, 08 Cal. Daily Op. Serv. 105, 2008 Daily Journal D.A.R. 82 (9th Cir.(Cal.), Jan 03, 2008) (NO. 06-55624).

Cooper Commons, LLC (the Debtor) filed a petition for relief under Chapter 11. The Debtor as debtor-in-possession continued to operate the enterprise (the construction of housing). Prior to the bankruptcy filing, the Comerica Bank (the Lender) had lent over $16 million to the Debtor. To save the project, the Debtor entered into three agreements with the Lender providing an additional $7 million. These agreements were each approved by the bankruptcy court. Counsel for the Debtor was the Firm. The Firm represented Debtor in negotiating the agreements. No provision was made in the agreements for payment to the Firm from the Lender’s collateral. Each agreement waived any right of the Debtor to surcharge under § 506(c) the funds provided by the Lender.A Trustee was appointed. The Trustee negotiated the $7 million in new financing from the Lender. The agreement with the Lender provided: [t]he amounts to be funded to the Trustee pursuant to this subparagraph shall include an amount of $888,469, which sum shall be placed by the Trustee in a separate account for the benefit of the Trustee and his professionals, and which shall be used only to pay the actual and necessary fees and costs of the Trustee and his professionals (“Trustee’s Administrative Fund”). The Trustee moved to augment the Trustee’s Administrative Fund and the Firm objected. In approving the granting of Trustee’s motion the Court stated:

Financing for the Debtor-in-possession was a practical necessity if it was going to run the enterprise. The Debtor-in-possession bargained

with the Lender to set the terms of this financing. Part of the bargain was that neither the loan funds nor the collateral for the loan should be subject to charge. In marked contrast with the agreement later made by the Trustee with the Lender, these earlier agreements carried no carve-out from the collateral for administrative expenses. As it was obvious, particularly to the Firm, that there would be administrative expenses, it was not through ignorance or inadvertence that no provision was made to pay them [the Firm]. 512 F.3d 533, 536. t

Research References: Dunaway, The Law of Distressed Real Estate, § 29:87; Bankruptcy Service, L. Ed. §§ 24:494, 24:542, 24:549; Norton Bankr. L. & Prac. 3d §§ 94:8, 94:21 to 94:24, 94:30 ; Bankruptcy Law Manual 5d §§ 6:42, 11A:22, 11A:30; 2008 Bankruptcy Service Current Awareness Alert 1.

Fourth Circuit

Does plaintiff’s general denial that he could not recall receiving bankruptcy notices overcome the presumption that letters placed in the mail are received?

Plaintiff’s general denial that he could not recall receiving the notices did not overcome the presumption that letters placed in the mail are received. Bosiger v. U.S. Airways, 510 F.3d 442, 49 Bankr.Ct.Dec. 67, Bankr. L. Rep. P 81,085, 42 Employee Benefits Cas. 1784 (4th Cir.(Va.), Dec 14, 2007) (NO. 06-2085).

If the name, interest, and address of a creditor is known, actual written notice is required. See City of New York v. New York, New Haven & Hartford R.R. Co., 344 U.S. 293, 296, 73 S.Ct. 299, 97 L.Ed. 333 (1953); see also Tulsa Prof’l Collection Servs., Inc. v. Pope, 485 U.S. 478, 489-90, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988). The Court cited Hagner v. United States, 285 U.S. 427, 430, 52 S.Ct. 417, 76 L.Ed. 861 (1932) (“The rule is well settled that proof that a letter properly directed was placed in a post office, creates a presumption that it reached its destination in usual time and was actually received by the person to whom it was addressed.”).

Research References: Dunaway, The Law of Distressed Real Estate, §§ 29:66, 30:90; Bankruptcy Service, L. Ed. §§ 12:564, 43:7, 43:11, 43:12; Norton Bankr. L. & Prac. 3d § 48:24; Bankruptcy Law Manual 5d §§ 3A:11, 9:64; 2008 Bankruptcy Service Current Awareness Alert 9.

Eighth Circuit Bankruptcy Appellate Panel

Does bankruptcy court have jurisdiction over a postconfirmation dispute between an unsuccessful bidder at a bankruptcy court authorized sale and the purchaser of debtor’s assets?

Bankruptcy court lacks jurisdiction over a postconfirmation dispute between an unsuccessful bidder at a bankruptcy court authorized sale and the purchaser of debtor’s assets. In re Farmland Industries, Inc., 378 B.R. 829, 49 Bankr.Ct.Dec. 45 (8th Cir.BAP (Mo.), Dec 05, 2007) (NO. 07-6046 WM).

Entity that had submitted a bid at auction sale of Chapter 11 debtor’s assets that was judged to be deficient brought adversary proceeding against successful bidder and other parties that allegedly conspired with it to prevent entity from participating in auction. Entity sought to recover on conspiracy and tortious interference theory, and defendants moved to dismiss. The Bankruptcy Appellate Panel held that proceeding was not proceeding over which bankruptcy court could exercise even non-core, “related to” jurisdiction, as dispute between non-debtor parties that was based entirely on state tort law, and that could have no conceivable impact on distributions to creditors under liquidating plan that was confirmed nearly four years earlier.

Research R eferences: Dunaway, The Law of Distressed Real Estate, § 28:7; Bankruptcy Service, L. Ed. §§ 45:522, 45:526 ; Norton Bankr. L. & Prac. 3d §§ 4:98, 4:99, 4:134, 4:126, 114:10; Bankruptcy Law Manual 5d § 7:5; 2008 Bankruptcy Service Current Awareness Alert 8.

Prof. Dunaway, Section Editor, is also Professor

Emeritus at Pepperdine University, School of Law.

Cases continued

�0 April/May 2008 Vol. 22 No. 1 AIRA Journal

Brokers continued from pg. 1agencies as well as U.S. securities self-regulatory organizations (“SROs”), such as the New York and American Stock Exchanges and the National Association of Securities Dealers, which operates the NASDAQ system.

That mandate, however, does not include the responsibility to preside over the liquidation of a securities broker. The history of federal legislation governing stockbroker liquidations in the U.S. extends back to the Bankruptcy Act of 1898 and before. The modern legislative framework is contained principally in two related statutes: SIPA and subchapter III of chapter 7 of the Bankruptcy Code.

SIPA and SIPCFollowing a period of great expansion in the 1960’s, the U.S. securities industry hit hard times, leading to the failure or instability of a significant number of brokerage firms. The resulting crisis in customer and investor confidence and the prospect that capital markets might fail altogether as solvent brokers were dragged down by failing brokers unable to honor trade commitments prompted Congress to enact SIPA in 1970. The law was substantially revamped in 1978 in conjunction with the enactment of the Bankruptcy Code.

A SIPA proceeding is commenced against a broker-dealer when the Securities Investor Protection Corporation (“SIPC”), a non-profit corporation whose members include most interstate broker-dealers, files an application for a protective decree regarding one of its members in federal district court. The court will issue a protective decree if the broker-dealer consents or fails to contest the petition, or if the court concludes that the broker-dealer: (i) is insolvent (on a balance sheet basis) or unable to meet its obligations as they mature; (ii) is the subject of a proceeding pending in any court or before any federal or state agency in which a receiver, trustee or liquidator has been appointed; (iii) is not in compliance with the financial responsibility or securities hypothecation requirements of the 1934 Act, SEC rules or applicable SRO rules; or (iv) is unable to prove that it

is in compliance with such rules. If the district court issues a protective decree, it appoints a trustee to oversee the broker-dealer’s liquidation and refers the case to the bankruptcy court.

SIPA affords limited financial protection to the customers of registered broker-dealers. A “customer” is any person who has a claim “on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral security, or for purposes of effecting transfer.” The term also includes “any person who has deposited cash with the debtor for the purpose of purchasing securities.”

SIPA liquidations generally involve customer claims and the claims of general unsecured creditors, such as vendors or judgment creditors. The former are satisfied out of a customer estate (a fund consisting of customer-related assets, such as securities and cash on deposit) while the latter are paid from the general estate (any remaining assets). The value of a customer’s account, or its “net equity,” is the measure of its preferred SIPA customer claim. “Net equity” is the total value of cash and securities owed to the customer as of the petition date, less the total value of cash and securities owed by the customer to the debtor as of the petition date. SIPC advances funds to the trustee as necessary to satisfy customer claims, but limited to $500,000 per customer, of which no more than $100,000 may be based on a customer claim for cash. SIPC is subrogated to customer claims paid to the extent of such advances. Those advances are repaid from funds in the general estate prior to payments on account of general unsecured claims.

As noted, the bankruptcy court presides over a SIPA case, and the case proceeds very much like a chapter 7 liquidation, with certain exceptions. SIPA expressly provides that to the extent consistent with its provisions, “a liquidation proceeding shall be conducted in

accordance with, and as though it were being conducted under chapters 1, 3, and 5 and subchapters I and II of chapter 7 of title 11.” This means, for example, that the automatic stay precludes the continuation of most collection efforts against the debtor or its property (but, as described below, not the exercise of certain rights under financial or securities contracts). Similarly, the SIPA trustee has substantially all of the duties of a bankruptcy trustee as well as a bankruptcy trustee’s powers, including the “strong arm” and avoidance powers and the ability to assume and assign executory contracts. Customers and creditors are required to submit proof of their claims against the debtor.

Stockbroker Liquidation under Chapter 7Chapter 7 of the Bankruptcy Code incorporates provisions separate and apart from (albeit similar to) SIPA that govern stockbroker liquidations. These provisions, which are contained in subchapter III of chapter 7, were enacted to address the lack of uniformity in rules and procedures governing intrastate stockbrokers who are not subject to the SEC’s financial responsibility rules. Stockbroker liquidations under chapter 7, as opposed to SIPA, are relatively rare. Once SIPC commences a SIPA proceeding against a broker-dealer, any pending chapter 7 case with respect to the debtor is automatically stayed, and will be dismissed upon completion of the SIPA liquidation case.

One important distinction between SIPA and chapter 7 stockbroker liquidations is that a SIPA trustee is required to distribute securities to customers to the greatest extent possible in satisfaction of their claims, while a chapter 7 trustee is entrusted with converting securities to cash as quickly as possible (except for securities specifically registered to particular customers) and delivering the cash to creditors, including customers, in satisfaction of their claims. Thus, SIPA presumes that customers prefer their securities, while chapter 7 presumes that they prefer cash. Notably, in both SIPA and chapter 7 cases, commencement of the case does not stay any exercise of the contractual rights of a creditor

AIRA Journal Vol. 22 No. 1 April/May 2008 �1

to liquidate, terminate, accelerate or net out obligations under a financial or securities contract, or to foreclose on any cash collateral pledged by the debtor. Disposition of or foreclosure on securities collateral, however, may be enjoined.

outlookAs noted, the Bankruptcy Code precludes relief to a securities broker under any chapter other than chapter 7. Recourse to chapter 11 is precluded because the complexities of chapter 11 are incompatible with the narrow purpose for which the special stockbroker liquidation provisions in chapter 7 were designed — the protection of customers. Notable attempts have been mounted to circumvent that proscription, but with limited success. For example, Drexel Burnham Lambert Group Inc. filed for chapter 11 protection in 1990, but only after selling its brokerage operations, which were ultimately liquidated. Commodities broker Refco Inc. filed for chapter 11 in 2005, notwithstanding a similar ban on commodity broker chapter 11 filings, contending that it should be permitted access to chapter 11 because its substantial brokerage

activities were carried out by an off-shore vehicle. The bankruptcy court ruled otherwise, and the Refco affiliate that was a registered commodities broker was liquidated in chapter 7 while Refco’s remaining operations and assets were ultimately liquidated in chapter 11.

Thus, few options are available to stock or commodity brokers intent upon obtaining a breathing spell while they attempt to sort out financial problems brought on by the sub-prime disaster. More likely than not, escalating liabilities will propel many brokers toward either SIPA or chapter 7, both of which are geared more toward protecting customers than creditors.

Charles M. Oellermann is a partner in the Business Restructuring and Reorganization Practice in the Columbus, Ohio office of Jones Day. Mark G. Douglas is the firm’s Restructuring Practice Communications Coordinator and Managing Editor of the Jones Day Business Restructuring Review. The views expressed in this article are solely those of the authors and should in no manner be attributed to Jones Day or its clients.

Past Conference Materials Available atwww.airacira.org

West Coast ConferenceLos Angeles, CAOctober 30, 2007$30

Restructuring and Investing ConferenceShanghai, ChinaOctober 21–24, 2007$50

23rd Annual ConferenceJune 6–9, 2007Chicago, IlBound Book (Includes CD) $75.00CD Only $25.00

Pre-Conference Materials:Bankruptcy Taxation $25.00Financial Advisors Toolbox $25.00

6th Annual ARPoR ConferenceSeptember 18, 2007

New York, NY$40

RoGUE RIVER FISHING TRIP, oREGoN

Interested in a Rogue River fishing trip October 23–25, 2008? Contact Grant Newton at [email protected]

New York, NY

Part 1: July 21-23, 2008



Washington, DC

Part 2: July 23-25, 2008

Las Vegas, NV

Part 1: June 2-4, 2008

Miami, FL

Part 3: May 19-21, 2008

Malibu, CA

Part 2: August 11-13, 2008


Dallas, TX



CIRA CoURSE DATES


CIRA Courses:


�� April/May 2008 Vol. 22 No. 1 AIRA Journal

Johann AldrianAustria Treasury

Eric AndersonBain Corporate Renewal Group

Zachary BancroftLowndes, Drosdick, Doster, Kantor

& Reed, P.A.

William CadiganTatum LLC

Roberto Castrofth Capital, LLC

Cameron CookAccuVal Associates

Brandon CrawleyAlvarez & Marsal

Michael FeliceHuron Consulting Group LLC

Jose FornellAlvarez & Marsal LLC

Matthew FrankAlvarez & Marsal

James HoltORIX Finance

Marcus JonesMercedes-Benz U.S. International, Inc.

Steven KeyserBank of America

J. Mark KuehnertAlvarez & Marsal

Paula LawBachecki Crom & Co

Robert LemeinHuron Consulting Group LLC

James LienHuron Consulting Group LLC

Lawrence ManningFTI Consulting Inc

Robert MargetonCapstone Advisory Group LLC

Eric MassellProtiviti Inc

Seth MooreBeirne, Maynard, & Parsons, LLP

Matthew MurrillHuron Consulting Group

Christopher NickellNDB Accountants & Consultants

LLP

Justin oldhamHuron Consulting Group LLC

Robert PachmayerMesirow Financial Consulting

Russell PerryBridge Associates LLC

Jeremy PetersonCapstone Advisory Group, LLC

William Porter IIILowndes, Drosdick, Doster, Kantor

& Reed, PA

Sreekumar PulakotFenix Financial Services

Brent RobisonAlixPartners, LLP

Scott SmithBBK Ltd

Gennady SpivakMahoney, Cohen & Company CPA, PC

Salman TajuddinFTI Consulting Inc

Mark WakefieldAlixPartners, LLP

Nathan WiebeDennis Murphy, CPA

Eric Yates

Alice YeeBachecki, Crom & Co

Jiayan ZhangBackecki, Crom & Co

new aIra MeMBers

New York, NYPart 1: July 21-23, 2008



Washington, DCPart 2: July 23-25, 2008

Las Vegas, NVPart 1: June 2-4, 2008

Miami, FLPart 3: May 19-21, 2008

Malibu, CAPart 2: August 11-13, 2008


Dallas, TXPart 2: November 5-7, 2008


CIRA CoURSE DATES


CIRA Courses:


AIRA Journal Vol. 22 No. 1 April/May 2008 ��

cluB 10Firms with 10 or more professionals who have received their CIRA certification or have passed all three examinations:

FTI Consulting Inc 68

Alvarez & Marsal LLC 54

AlixPartners, LLP 44

Kroll Zolfo Cooper LLC 39

Deloitte. 33

Mesirow Financial Consulting LLC 27

Grant Thornton LLP 23

Huron Consulting Group LLC 21

Navigant Capital Advisors LLC 19

Capstone Advisory Group LLC 17

KPMG LLP 17

PricewaterhouseCoopers LLP 15

LECG LLC 14

Protiviti Inc 14

BDo Seidman LLP 13

J H Cohn LLP 11

CRG Partners Group LLC 10

DLC Inc. 10

eIghT new cIras joIn The ranKs

Elan Ben-AviGetzler Henrich & Associates LLC

Adam BoydGoldin Associates LLC

Ellen GordonAlixPartners, LLP

Philip GoyBBK Ltd

Sven JohnsonAlvarez & Marsal LLC

Michael LiebmanAlvarez & Marsal LLC

Brian LinscottHuron Consulting Group LLC

Alexandra MahnkenHuron Consulting Group LLC

Georgiana NerteaEisner LLP

Minesh PatelStandard & Poor’s

Roger ScadronFTI Consulting Inc

Angela ShortallProtiviti Inc

Thomas SkattumNavigant Capital Advisors, LLC

Mark SlaneGoldin Associates LLC

Krysten ThomasMesirow Financial Consulting LLC

Nick ZaccagniniHuron Consulting Group LLC

The following members have recently changed firms, positions or addresses. Please update your contact lists. If you would like to report a recent move, please go online to www.aira.org

MeMBers on The Move

John BaumgartnerNavigant Capital Advisors

2 Houston Center 909 Fannin, Suite 1900Houston, TX 77010

[email protected]

Michael FinemanThird Avenue Management

4 Lorraine Road Summit, NJ 07901

[email protected]

Sharon GoldbergAgricap Financial Corp

350 S Figueroa St #501 Suite 200Los Angeles, CA 90071

[email protected]

Larry StilesLarry M Stiles CPA

1001 Morehead Square Dr. Suite 330 Charlotte, NC 28203

[email protected]

Adriana VidalMesirow Financial Consulting LLC

2 South Biscayne Blvd, Suite 1800 Miami, FL 33131

[email protected]

PresortedFirst-Class Mail

U.S. Postage

PAIDJefferson City, MO

Permit No. 266

Association of Insolvency & Restructuring Advisors

221 Stewart Avenue, Suite 207Medford, OR 97501

Phone: 541-858-1665Fax: 541-858-9187

[email protected]

AIRA officers and Board of Directors

DANIEL E. ARMEL, CIRARoBERT BINGHAM, CIRA

Kroll Zolfo Cooper LLCERIC DANNER, CIRA

CRG Partners Group LLCJAMES DECKER, CIRA

Alvarez and Marsal Corporate FinanceMITCHELL E. DRUCKER

Garrison Investment GroupHoWARD M. FIELSTEIN, CIRA, CDBV

Margolin Winer & Evens, LLPMICHAEL GoLDSTEIN, ESq.

Stutman, Treister & Glatt, PCGREGoRY HAYS, CIRA

Hays Financial Consulting, LLCMARGARET A. HUNTER, CIRA

THoMAS P. JEREMIASSEN, CIRALECG, Inc.

BERNARD A. KATZ, CIRAJ. H. Cohn, LLP

FARLEY LEE, CIRA, CPADeloitte Financial Advisor Services LLP

H. KENNETH LEFoLDT, JR., CIRALefoldt & Company

WILLIAM K. LENHART, CIRABDO Seidman LLP

JAMES M. LUKENDA, CIRAHuron Consulting Group LLP

KENNETH J. MALEK, CIRA, CDBVGrant Thornton LLP

J. RoBERT MEDLIN, CIRAFTI Consulting, Inc.

PAUL D. MooRE, ESq.Duane Morris LLP

THoMAS A. MoRRoW, CIRAAlixPartners, LLP

DAVID R. PAYNE, CIRA, CDBVD. R. Payne & Associates, Inc.

THEoDoRE PHELPS, CIRA, CDBVPhelps Consulting Group

MARC RoSENBERG, ESq.Kaye Scholer LLPDURC SAVINI

Miller Buckfire & Co.ANDREW SILFEN, ESq.

Arent Fox PLLCPETER STENGER, CIRA

Grant ThorntonMICHAEL E. STRANEVA, CIRA

Ernst & Young, LLPJoEL A. WAITE, ESq.

Young Conaway Stargatt & Taylor, LLPSPECIAL CoUNSEL:

KEITH J. SHAPIRo, ESq. Greenberg Traurig, LLP

PRESIDENT: ALAN HoLTZ, CIRAAlixPartners, LLP

PRESIDENT ELECT : GRANT STEIN, ESq.Alston + Bird LLP

CHAIRMAN: SoNEET KAPILA, CIRAKapila & Company

VICE PRESIDENT, INTERNATIoNAL: STEPHEN DARR, CIRA, CDBVMesirow Financial Consulting LLC

VICE PRESIDENT CIRA/CDBV: ANTHoNY SASSo, CIRADeloitte Financial Advisory Services LLP

VICE PRESIDENT oF DEVELoPMENT: FRANK CoNRAD, CIRAWeiser LLP

VICE PRESIDENT oF MEMBERSHIP: GINA GUTZEIT, CIRAFTI Consulting, Inc./Palladium PartnersSECRETARY: PHILIP J. GUND, CIRA

Marotta Gund Budd & Dzera, LLCTREASURER: MATTHEW SCHWARTZ, CIRA

Bederson & Company LLPEXECUTIVE DIRECToR: GRANT W. NEWToN, CIRA

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