CORE/9990000.5806/119083947.1

Arizona Bankruptcy American Inn of Court CLE Materials

Best Practices for Commercial and Consumer Bankruptcy: The Best Practices Court

Table of Contents

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Consumer Bankruptcy Script …………………………………… 1st Document Consumer Bankruptcy Code Summary and Best Practice Pointers………… … 2nd Document Consumer Bankruptcy Questions and Answers……………… 3rd Document Commercial Bankruptcy Fact Pattern……………………………… 4th Document, P.2 Commercial Bankruptcy Legal Issues & Citations……………… 4th Document, P.4 Commercial Bankruptcy Script ……………………………………. 4th Document, P.7 Presentation Slides and Graphics…………………………… 5th Document

CORE/9990000.5806/119083066.1

Arizona Bankruptcy American Inn of Court

CLE Materials

Best Practices for Commercial and Consumer Bankruptcy: The

Best Practices Court

Consumer Bankruptcy - Script

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Script: Consumer Best Practices Character Key: TT = Thirsty Trustee (Chapter 7 Trustee) AA = Admirable Attorney (Chapter 7 Trustee’s Attorney) DD1 and DD2 = Deceitful Debtors (Chapter 7 Joint Debtors) LL = Lazy Lawyer (Debtors’ counsel) J = Judge Narration Ms. Deceitful, through counsel Lazy Lawyer, filed a Chapter 7 petition on February 23, 2015. A § 341 Meeting of Creditors was held on April 1, 2015. As Ms. Deceitful and Lazy Lawyer approached Thirsty Trustee, Ms. Deceitful tripped in her stilettos and spilled all of the contents of her Louis Vuitton handbag! As Ms. Deceitful gathered the contents of her designer handbag, Thirsty Trustee observed that Ms. Deceitful was wearing a diamond bracelet and an engagement ring and that the following items were on the floor: Arizona Cardinals season tickets, a receipt for a winning lottery ticket, keys to a Lamborghini, and a prepetition paystub reflecting a $10,000 bonus – none of these items were disclosed in Ms. Deceitful’s Schedules. During the meeting, Thirsty Trustee questioned Ms. Deceitful as to why none of the observed items were disclosed. Ms. Deceitful proclaimed that Lazy Lawyer never told her that she needed to list any of these items and that the bonus was not “current monthly income.” Thirsty Trustee demanded that Lazy Lawyer provide proof that he gave Ms. Deceitful the required written notices under §§ 342 and 527. The § 341 Meeting concluded. Thirsty Trustee subsequently hired counsel, Admirable Attorney, and filed an Adversary Complaint objecting to discharge under § 727(c) and for turnover pursuant to § 542. An Evidentiary Hearing follows, which we will join LIVE. Evidentiary Hearing J: Appearances in the matter of Thirsty Trustee v. Debbie Deceitful. AA: Admirable Attorney on behalf of Thirsty Trustee. LL: Lazy Lawyer here! I used to represent Debbie Deceitful, until I found out just how

deceitful she was! I filed a Motion to Withdraw a month ago but, apparently, your Court is also lazy - the Motion has not been granted.

J: Well, the record does not reflect your client’s consent to the withdraw, nor a Notice of

Bar Date and Certificate of Mailing, so it appears YOU are the lazy one who hasn’t prosecuted your own Motion! In any event, Local Rule 9010-1 provides that you remain counsel of record until a formal Order Granting your withdrawal has been entered, so I hope you came prepared today!

J: Miss - please identify yourself for the record (to Krystal; Ms. Deceitful) D: Ms. Deceitful here. I just want to say – Lazy Lawyer never told me we had to list my

Lamborghini. The only reason I filed the bankruptcy is because I spent all of our savings paying off the loan on the Lamborghini – I better not lose it!

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J: Ok, Ms. Deceitful – we will get to that. For the record, we are here today for an

evidentiary hearing on Thirsty Trustee’s complaint objecting to discharge and for turnover of the undisclosed assets. Admirable Attorney, please provide a brief background of the case.

AA: Thirsty Trustee has filed a Complaint under § 727(c) objecting to discharge due to Ms.

Deceitful’s clear intent to defraud her creditors by concealing several valuable assets which came to Thirsty Trustee’s attention at the 341 Meeting of Creditors on April 1, 2015. These assets include a Louis Vuitton handbag (and where there is one, you know there is more, your Honor!), a diamond bracelet, an engagement ring, Arizona Cardinals season tickets, $2,000 in lottery winnings, a $10,000 pre-petition bonus, and even a Lamborghini – which I believe we heard Mrs. Deceitful indicate on the record today is free and clear of any liens. The estimated value of these undisclosed assets is approximately $310,000. Ms. Deceitful has not amended her schedules to include these assets, has not turned over the assets despite Thirsty Trustee’s repeated demands, and insists that Lazy Lawyer never told her that she needed to disclose these assets, nor that she could lose them. Thirsty Trustee inquired as to whether Lazy Lawyer provided the required written notices to Ms. Deceitful regarding disclosure of assets and income and was assured the required notices were provided, however, as of this date, Thirsty Trustee has not received proof.

J: Ok, let’s start with the required notices...(Krystal jumps in) D: AGAIN – Lazy Lawyer didn’t tell me that I had to disclose these items – THIS IS NOT

FAIR because…(Trish jumps in) J: Let me finish my sentence, please. Lazy Lawyer how do you respond to the Trustee’s

allegations about your apparent failure to provide the required notices? LL: I’ve heard of these notices, but I figured verbal notice was sufficient. When Thirsty

Trustee asked if I had copies of the written notices, I thought it was an April Fool’s joke! AA: These notices are no joke! Your Honor, as you know, Debt Relief Agencies are required

to provide written notices to potential debtors regarding bankruptcy information and disclosures. Under § 527 of the Bankruptcy Code, any debt relief agency, including debtor’s counsel, that provides bankruptcy assistance to an assisted person in return for payment of money or other valuable consideration, is required to provide the assisted person written notice under § 342(b)(1).

LL: I’m not a debt relief agency, I’m just a lawyer your Honor! J: Carry on, Admirable Attorney. AA: The required Notice shall include a description of the different chapters of bankruptcies,

their purposes, benefits and costs, the types of services available from credit counseling agencies, and a statement regarding the penalties for knowingly and fraudulently concealing assets. In addition to the written notice required under § 342(b)(1), § 527 requires notice be provided to assisted persons advising that (1) all information provided in a petition must be complete, accurate and truthful, (2) that all assets and liabilities are disclosed, (3) that current monthly income as specified in § 707(b)(2) is required to be

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stated after reasonable inquiry, and (4) that any information provided is subject to audit, with potential for dismissal and sanctions for inaccuracies. § 527 also requires that the debt relief agency instruct the assisted person on how to determine the value of assets, determine current monthly income, and determine exemptions for any assets. The Code requires debt relief agencies to keep copies of the provided notices for two years after the date they were given.

J: Thank you Admirable Attorney. Narrator: at this point Ms. Deceitful is called to the witness stand and sworn in to give her testimony. AA: Ms. Deceitful, did you receive the required information from Lazy Lawyer regarding

disclosing all of your assets, liabilities, and income? D: Judge I am telling you – I knew nothing and thought that I could just pick and choose

what I wanted to include in the bankruptcy. I know I didn’t get any written notices, and there was so much discussed at the initial consultation, I really don’t remember anything. I didn’t even see Lazy Lawyer again until the day of the § 341 Meeting. I paid Lazy Lawyer $5,000 and he created this mess!

LL: Your Honor, I know I provided verbal notice, I just don’t have any proof of it. Ms.

Deceitful assured me she was listening carefully to my every word and that she would remember everything I said, and I trusted her.

AA: Well, Lazy Lawyer, this is precisely the reason that the Code requires attorneys to

provide such notice to potential debtors - in writing. It is nearly impossible for debtors to remember all of the information that their attorneys give them. It is the attorney’s job to provide written notices to the debtor so she can make informed decisions about how to proceed with her bankruptcy filing. It is also the attorney’s job to assist the debtor in gathering all of the required information by asking many questions, multiple times and in different ways, performing any public searches that might provide additional information, and reviewing all of the provided information with the debtors before submitting the petition to the Court. I respectfully request that sanctions be imposed upon Lazy Lawyer for failure to provide the notices to Ms. Deceitful.

BREAK FOR QUESTION What penalty does the Code require for a debt relief agency’s failure to provide the notices required by §§ 342 and 527? A. No penalty. B. The DR Agency must refund all fees paid to the client. C. The DR Agency must return $500 to the client. D. The DR Agency is subject to sanctions as determined by the Court. Answer slide w/ reasoning J: I tend to agree. Based on the evidence and testimony presented today, it is clear that

you are not familiar with the Bankruptcy Code and you are indeed a lazy lawyer and sanctions are imposed as requested: you shall refund the $5,000 Ms. Deceitful paid your firm.

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J: OK, let’s move on the undisclosed assets. Admirable Attorney, I’ll turn it over to you. AA: As we have discussed, numerous assets were revealed the § 341 Meeting, which were

not disclosed. Ms. Deceitful I will remind you that you are still under oath and…(Krystal jumps in)

D: I don’t really know what that means, but whatever. AA: Recall that you agreed to give the truth, the whole truth and nothing but the truth? D: Yes, but who’s truth do you want and - more importantly - can you handle the truth! AA: Let’s move on - did you in fact own the assets on the date of your bankruptcy filing? D: Well, I have all of the accessories, the season tickets and the Lamborghini, but I already

spent all of the cash on a new Quad. Also, I didn’t deposit the paycheck with the bonus because we didn’t want to bankrupt that.

AA: I take that as a yes. Were you aware that you needed to disclose all property that you

owned, as well as all creditors you owed, and all income you received for the six months prior to filing in your bankruptcy documents?

D: I think Lazy Lawyer may have mentioned something in the initial consultation about

having to list my furniture and two vehicles, but that was it. I figured I only had to list the items that I didn’t want anymore. I wanted to keep the Lamborghini and cash, so I didn’t include them in the documents. I am pretty sure Lazy Lawyer told me that bonuses don’t count as income either; that’s why it’s called a “bonus” – it’s just extra money, you don’t have to report it to anyone. Lazy Lawyer never asked me about anything listed, he just emailed me the signature pages, then I signed and emailed them back to him. I assumed everything looked good.

J: Lazy Lawyer, you know that, by your signature on Deceitful Debtors’ bankruptcy petition,

you certified under penalty of perjury that after making appropriate inquiry, you have no knowledge that the information in the Schedules is incorrect.

LL: Look, this is what I do. When a potential new client comes into my office, I have them

complete a questionnaire – it’s two full pages your honor! The client fills in information regarding their assets, income and creditors, and I use those 2 pages to determine whether I need to follow up with more inquiry. My office pulls the clients’ credit report and we ask the clients to list their average monthly income and expenses. I trust that my Clients are always truthful when completing these tasks, so I don’t bother to do any follow up. I don’t have any reason not to believe my Clients. I think my initial questionnaire and my Clients’ word should be enough.

AA: Obviously you became aware of the undisclosed assets at the § 341 Meeting. What did

you do to address the nondisclosure? LL: I immediately filed my Motion to Withdraw as Ms. Deceitful’s attorney! BREAK FOR QUESTION

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What should Lazy Lawyer have done after becoming aware of the undisclosed assets?

A. Withdrew from the case immediately. B. Amend Schedule A/B to add all undisclosed assets. C. Amend Schedules A/B and C to disclose the assets and exempt the engagement

ring. D. Advise the client not to provide 2015 tax returns to the Trustee and hope the case gets

dismissed. Answer slide – In re Gray J: Do you have anything else to add, Lazy Lawyer. LL: Judge I just thought of something: the attorney client privilege prohibits me from

answering Admirable Attorney’s questions. I think the 5th Amendment might apply too. Out of an abundance of caution, I am going to claim both and not say another word!

J: I think it’s a little late for that now…but let’s ask the audience! BREAK FOR QUESTION What should Lazy Lawyer have done:

A. Claim the 5th Amendment and not answer any questions. B. Claim attorney client privilege and not answer any questions. C. Disclose everything he knows – he’s defending himself! D. Both A and B.

NOTE: A Best Practice tip is to avoid surprises at the § 341 Meeting. YOU should take note of fancy, undisclosed items before the Meeting starts and prepare your client to properly address the nondisclosure during the Meeting, or advise the client of your need to disclose the items yourself.

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Arizona Bankruptcy American Inn of Court

CLE Materials

Best Practices for Commercial and Consumer Bankruptcy: The

Best Practices Court

Consumer Bankruptcy – Questions and Answers

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Consumer Best Practice Tips, Cases and Law Question No. 1: What penalty, if any, does the Code require for a debt relief agency’s failure to provide the notices required by § 527?

A. No penalty. B. The Debt Relief Agency is subject to sanctions at the Court’s discretion. C. The Debt Relief Agency must return to the client all fees received (at minimum). D. The Debt Relief Agency must return $500 to the client as a penalty.

C is correct. 11 U.S.C. § 526(c)(2) provides that “any debt relief agency shall be liable to an assisted person” for “actual damages” in the amount of all fees received in exchange for bankruptcy assistance AND for reasonable attorneys’ fees and costs if the agency intentionally or negligently fails (among other things) to provide the notices required by § 527. See also In re Gutierrez, 356 B.R. 496, 500 (Bankr. N.D. Cal. 2006) and “How Much Diligence is Due,” American Bankruptcy Institute Journal, November 2013, G. Thomas Curran Jr, pg. 24-25, 74. Best Practice Tips:

• Create your packet of required Notices ASAP, if you don’t already have one; o Some language can be taken directly from the Code; you will need to create the

other parts of your Notice packet. • Provide the packet to all potential bankruptcy clients at your initial consultation – no need

to risk exceeding the 3 day limit • Remind clients of the Notice packet; ensure they have read & understood the contents • Keep copy of Notice packet given to potential bankruptcy clients for 2 years

Question No. 2: What should Lazy Lawyer have done after becoming aware of the undisclosed assets?

A. Withdrew from the case immediately. B. Amended Schedule A/B to add all undisclosed assets. C. Amended Schedules A/B and C to disclose the assets and exempt the engagement ring. D. Advised Debbie not to provide 2015 tax returns to the Trustee and hope the case gets

dismissed. C is correct. Bankr. Rule 1009 provides Schedules can be amended at any time. BAP has held that the Court is “without authority” to deny an amended exemption on the basis of bad faith. In re Gray 523 B.R. 170 Law: 11 U.S.C. §§ 521, 522, and 526, and Bankr. Rule 1009 See also Gray v. Warfield (In re Gray), 523 B.R. 170 (9th Cir. BAP 2014) [“bankruptcy court is without federal authority to disallow the Amended Exemption or to deny leave to amend exemptions based on Debtors’ bad faith.”] and “How Much Diligence is Due,” American Bankruptcy Institute Journal, November 2013, G. Thomas Curran Jr, pg. 24-25, 74.

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Best Practice Tips:

• A Debtor’s attorney should diligently inquire of assisted persons into Debtor’s assets, liabilities, income and expenditures beyond what the Debtor tells attorney

o Take note of any items on the Debtor when they come in for meetings • Upon discovery of any omitted information, Debtor’s attorney should verify the

information with Debtor and recommend prompt amendment of the appropriate schedules.

o If an item amended is an added asset, which would have had an applicable exemption at the time of filing, then Schedule C should be amended to add the exemption as well.

• Attorney’s failure to disclose information on a petition may result in penalties, attorneys’ fees and costs or other disciplinary measures.

• If your client shows up at the § 341 Meeting wearing any fancy, undisclosed items, YOU should take note of them and prepare your client (before the Meeting starts) to properly address the nondisclosure during the Meeting.

Question No. 3: What should Lazy Lawyer have done at this hearing?

A. Claim the 5th Amendment immediately; no answers. B. Immediately claim duty of confidentiality under E.R. 1.6; no answers. C. Disclose everything he knows - he’s defending himself! D. Immediately claim attorney client privilege; no answers.

B is correct. Debtor’s attorney should have asserted his duty of confidentiality to Debtor under E.R. 1.6 – the attorney would be allowed to remain silent until a Court order instructed him to disclose information. Best Practice Tips

• Debtor’s attorney would not have a basis to assert the 5th Amendment to protect information in this case because it does not appear that he has reason to believe a criminal investigation will result; if Debtor’s attorney could point to a criminal proceeding that may result, he may be able to use the 5th Amendment to shield himself from questioning. Justification must be established on a question by question basis. See In re Connelly, Interim Investors Committee v. Jacoby, and U.S. v. Bauer (cites below).

• Debtor’s attorney would most likely not have a basis to assert the attorney-client privilege in this case because the Debtor placed her communication with attorney at issue, thereby waiving the privilege – See Upjohn Co. v. United States (cite below).

o Information obtained for purpose of disclosing in a petition may not be privileged information – See In re Wilkerson (cite below).

Cases: In re Connelly, 59 B.R. 421 (Bankr. N.D. Ill. 1986); Interim Investors Committee v. Jacoby, 90 B.R. 777 (W.D. N.C. 1988); U.S. v. Bauer, 132 F.3rd 504 (1997); Upjohn Co. v. United States, 449 U.S. 383 (1981); In re Wilkerson, 393 B.R. 734 (2007) Law: U.S. Const. Amend V.; Fed. R. Evid. 502; A.R.S. Sup. Ct. Rules, Rule 42, Rules of Prof. Conduct, ER 1.6 of the Arizona Rules of Professional Responsibility.

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Arizona Bankruptcy American Inn of Court CLE Materials

Best Practices for Commercial and Consumer Bankruptcy: The Best Practices Court

Commercial Bankruptcy - Fact Pattern

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Debtor, It’s All About the Money, LLC, at one time owned 5 parcels of land. 4 parcels were in downtown Detroit and were secured by loans from Quicky Loans. These properties went into default and the lender sought and obtained a judgment for $1,000,000, determining that the values of properties on the outskirts of Detroit were not worth foreclosing and owning. The fifth parcel of land is located in Phoenix and is an income producing Apartment Complex. At the time of the judgment, Quicky Loans had NO interest in the property. The Apartment Complex is 30% occupied and has an appraisal of $1 Million and is secured by a first lien with Scavenger Loan LLC in the amount of $980,000, accruing interest at 7.5% per annum, and a maturity date in 2018. As part of a workout with Quicky Loans, Debtor has given them a 2nd Deed of Trust for the full amount of the judgment on the Phoenix Apartment Complex together with a personal guaranty from the principal of the Debtor. However, the principal is married and the guaranty is signed by husband only. As a result of the judgment and some setbacks at the Phoenix Apartment Complex, Debtor has 20 unsecured creditors totaling approximately $50,000. Debt service and continued threats from Quicky Loans left the Debtor no alternative but to file a Chapter 11 bankruptcy. Debtor has filed a plan in which it proposes to treat each of the Creditors as follows:

Class 1. Secured Claim of Scavenger Bank. Scavenger Bank will be treated as fully secured. The outstanding balance will be amortized over 30 years, with interest to accrue at 4% per annum, with a 5 year balloon, with monthly payment at the amortized amount.

Class 2. Secured Claim of Quicky Loans. Quicky Loans will be paid its secured claim of $20,000, payable over a 5 year period, without interest, at $333.33 a month. The remaining portion of the claim balance will be treated in Class 4.

Class 3. Unsecured Creditors. Unsecured creditors will receive $250 a month for 5 years for a total of $15,000. In addition, equity shall contribute an additional $7500, payable on the effective date, which shall be paid in addition to the Debtor’s contributions.

Class 4. Deficiency Balance of Quicky Loans. The unpaid deficiency balance of Quicky loans shall be paid $250 dollars a month for a period of 5 years for a total of $15,000. In addition, equity shall contribute $7,500 payable on the effective date, which shall be in addition to the Debtor’s contributions.

Class 5. Equity. Equity shall retain ownership and control of the Debtor. The debtor has a passive 1% investment interest in a marijuana dispensary, which Debtor intends to liquidate to fund the plan. The plan also provides for injunctive relief for all co-debtors as well as a full release. The liquidation analysis establishes that, in all likelihood, only Scavenger will receive any recovery from Debtor’s assets. Quicky Loans has made the § 1111(b) election. Debtor claims that Quicky Loan’s interest in the Apartment Complex is of “inconsequential value.”

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Both Quicky Loans and Scavenger Bank have filed objections to the Debtor’s Plan.

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Commercial Bankruptcy - Legal Issues & Citations Issue #1: Modification of interest rates and maturity dates of secured loans. Pursuant to Section 1129(b), a chapter 11 plan of reorganization may “cramdown” a non-consenting creditor’s secured claim if the plan: (a) satisfies all confirmation requirements of Section 1129(a) except for 1129(a)(8); (b) provides that holders of impaired secured claims retain the liens securing such claims to the extent of the allowed amount of such claims, whether or not the debtor retains the property subject to such liens; and (c) provides that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowe amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property. In order to meet the third requirement, a Plan must provide an interest rate that will compensate the impaired secured creditors for receiving deferred cash payments in lieu of a lump sum cash payment on the effective date. The United States Supreme Court in Till v. SCS Credit Corp, with a goal of minimizing expensive evidentiary hearings on interest rates, adopted a “formula” approach for determining appropriate cram-down interest rates. The Supreme Court’s formula approach starts with the prime rate and then adjusts that rate upward to account for the additional risks of non-payment posed by lending to a bankrupt debtor. The Till case was a Chapter 13 and the interest rate at issue was for a vehicle loan. The appropriate methodology that should be used to determine the cramdown interest rate in a Chapter 11 case remains a topic of debate. A majority of lower courts (including the 9th Circuit) have looked to whether there exists an efficient market for comparable securities such that a market rate can be used, and if there is no efficient market, then the Supreme Court’s formula approach is used, although in some cases with a US Treasury rate or LIBOR instead of the prime rate as the base rate. Although the Supreme Court did not establish an appropriate range for risk premiums, it noted that other courts had found 1% to 3% to be the goalposts. The Ninth Circuit Bankruptcy Appellate Panel has held (in an unpublished decision) that the evidentiary burden to demonstrate that a higher interest rate should be used is placed on the objecting creditor. A secured creditor opposing a proposed cramdown interest rate should be prepared to present expert evidence to support a claim that a higher cramdown interest rate is justified. Cases: Till v. SCS Credit Corp., 541 U.S. 465 (2004); In re Dunlap Oil Company, Inc. BAP No. AZ-14-1172 (B.A.P. 9th Cir. December 5, 2014).

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Issue #2: Gerrymandering of classes. Section 1122(a) governs classification of claims. Generally, a plan may place claims in a particular class if such claim is substantially similar. In the 9th Circuit, the judge must evaluate the nature of each claim. However, even if claims are substantially similar, the plan can place claims in different classes if the debtor can provide a business or economic justification for such classification. If the justification is based on the creditor’s right to make an 1111(b) election, that is not sufficient without a business or economic justification. The 9th Circuit has found that separate classification of a claim that was personally guaranteed by a non-debtor does not violate 1122(a) because the legal character was not substantially similar to other unsecured claims. The bankruptcy court may consider whether the claimant has a non-debtor source for repayment of its claim when determining whether claims are substantially similar. Statutes and Cases: 11 U.S.C. § 1122(a); In re Loop 76, LLC, 465 B.R. 525 (9th Cir. B.A.P. 2012); In re Johnston, 21 F.3d 323 (9th Cir. 1994). Issue #3: Funding of plan through liquidation of 1% interest in marijuana dispensary. Medical marijuana use is now legal in 23 states and the District of Columbia, yet remains illegal under federal law. Recently there have been two cases in which individuals filed for bankruptcy relief under Chapter 7 and Chapter 13. The Chapter 7 case was dismissed for “cause” because the trustee could not take possession and control of the debtors’ assets without violating federal law, and allowing the debtors to remain in a Chapter 7 when the trustee was unable to administer valuable assets for the benefit of creditors would allow them to receive a discharge without turning over their nonexempt assets. They asked to convert to a Chapter 13, but the court denied the motion, stating that it would be a bad faith filing due to the “inability to propose a confirmable chapter 13 plan.” The 10th Circuit B.A.P. affirmed. In another recent case, an individual who had a medical marijuana business filed a Chapter 13 and proposed to segregate his funds and only fund plan payments with non-marijuana business proceeds. The Court held that even if the funds were segregated, the court and trustee would “inevitably support the Debtor’s criminal enterprise,” for example, through the automatic stay that would allow the debtor to retain possession and use of assets that allowed him to run his illegal operations. However, the court determined that the case was filed in good faith, and did not dismiss the case but enjoined the debtor from conducting his medical marijuana business as long as he remained in bankruptcy. Cases: In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015); In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015); In re McGarey, Case No. 2:13-bk-15074-BKM (Bankruptcy Court, District of Arizona). Article: “It’s All Going to Pot,” American Bankruptcy Institute Journal, December 2015, B. Summer Chandler, pg. 46-47, 101.

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Issue #4: Releases of Non-Debtor Parties. The 5th, 9th and 10th Circuits prohibit non-debtor releases. This is based on Section 524(e), which provides: "[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." The 2nd, 3rd, 4th, 6th, 7th, and 11th Circuits have held that non-debtor releases/injunctions are permissible under certain circumstances. The 1st and D.C. Circuits have indicated that they agree. Cases: In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re American Hardwoods, Inc., 885 F.2d 621 (9th Cir. 1989). Compare with the 11th Circuit – In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015). See also Xhibit Corp., et. al. (Case No. 2:15-bk-00679-BKM, Bankruptcy Court, District of Arizona). Issue #5: § 1111(b) Election. Under Section 506(a), a secured creditor’s claim is secured only to the extent of the value of the collateral, with the balance of the claim being an unsecured deficiency claim. Section 1111(b) empowers an undersecured creditor to elect to have the total amount of its allowed claim (both the secured portion and the unsecured deficiency portion) be treated as though it were fully secured by the collateral. After an 1111(b) election, in order for a debtor to confirm its plan and retain the collateral, the plan must provide that the creditor will receive the present value of the entire allowed claim. A debtor’s plan may become infeasible due to the greater payout required by Section 1111(b)(2), requiring the debtor to amend its plan or surrender the collateral to the secured creditor. An undersecured creditor cannot make the § 1111(b) election if the creditor’s interest in the collateral is of “inconsequential value.” Many have argued that there is “inconsequential value” when the secured portion of the claim is only a very small percentage of the total claim. The focus should be on the value of the property to which the lien attaches, not the amount of the secured claim in comparison to the value of the collateral. Cases: In re Tuma, 916 F.2d 488 (9th Cir. 1990); McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 277 (D. Ariz. 2015).

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SCRIPT for Commercial Bankruptcy Narrator - Judge - Debtor's counsel - Scavenger Bank's counsel - Quicky Loan's counsel - Narrator: We are live outside the bankruptcy courthouse, where the hearing on confirmation of a very bold Chapter 11 Plan of Reorganization of Debtor It's All About the Money is about to take place. This Debtor has a real sob story. It used to own 5 parcels of land, but 4 of them were in Detroit…very unfortunate. The loan was from Quicky Loans, the well-known predatory lender. Quicky Loans sued and got a $1 million judgment against It's All About the Money. Oh how true that name turned out to be. But all hope is not lost yet! The Debtor's last asset is an Apartment Complex in Phoenix that generates some income and is worth $1 million! The morally unscrupulous Scavenger Bank has a lien against the Apartment for $980,000, which means there's $20,000 of equity! The Debtor just might stand a chance here. Let's go to the courtroom now and see if the Debtor is successful or if Scavenger Bank and Quicky Loans can destroy the Debtor's hopes and dreams. Issue #1: Modification of interest rates and maturity dates of secured loans. Judge: Counsel, appearances please. Debtor's Counsel, Scavenger Bank, and Quicky Loans make appearances. Judge: First of all, I don't like this case. If we can't resolve these issues today, then I'm going to set a final evidentiary hearing on Saturday morning at 8:30 a.m. Now that we're clear, I'm first going to reiterate the key facts as I understand them. The Debtor's primary asset is an Apartment Complex which is 30% occupied and has an appraisal of $1 Million. Scavenger Bank has a first lien of $980,000. Quicky Loans has a second lien of $1 million. The liquidation analyses establishes that, in all likelihood, only Scavenger will receive any recovery from Debtor’s assets. Both Quicky Loans and Scavenger Bank have filed objections. Let's start going through the objections one by one. I understand Scavenger Bank has an objection to its Plan treatment? SB’s Counsel: Yes, your honor! I don’t even know where to begin. I have several objections! I don't like my client's plan treatment. Scavenger Bank's claim is Class 1 of the Plan and will be treated as fully secured, as it should be. However, the outstanding balance will be amortized over 30 years, with interest at 4% per annum, with a 5 year balloon, with monthly payments at the amortized amount. Under the Plan, First, the Debtor is lowering my client’s interest rate from the contract rate of 7.5% to a plan rate of 4.0%, and extending the maturity date of the loan by 3 years. That’s not acceptable to Scavenger Bank and I don’t think it’s allowed.

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Debtor’s Counsel: Why isn’t it allowed? As far as I’m concerned, Bankruptcy Court in the 9th Circuit is the Wild West. You can pretty much get away with whatever you want to do, and that’s what the Debtor wants to do. SB’s Counsel: Well, there is a case from the Supreme Court called Till, and I’m pretty sure that it says you have to give my client a higher interest rate. I’ll take 7.0%. Debtor’s Counsel: I don’t remember exactly what Till says, but I think that’s too high. That’s almost as much as your contract rate of 7.5%. And everyone knows you should get a better deal in Chapter 11. That's why I lowered the interest rate and extended the term a few years. SB’s Counsel: Yes, and the contract rate of 7.5% is what you would find on the market. My client is well aware of the commercial market and what rates it is offering on commercial loans these days. So 7.0% is a deal as far as I'm concerned. Debtor's Counsel: Well, you haven't presented any evidence of market rates, and it's your burden to do so. But I'm a nice guy, so I'll give you a generous 6.0% interest rate if you'll agree to the amortization and maturity extension. SB's Counsel: Evidence? I'm telling you right now what market rates and terms are - isn't that sufficient evidence? Look, I don't like the extension of the maturity date from 2 years to 5 years, but my client can live with it. However, the amortization of 30 years is not something you'll find on the market. For this type of commercial loan, the best you'll get is a 20 year amortization. Debtor’s Counsel: But that’s the amortization my client needs to be able to debt service. And I don’t know of any cases that say I can’t do that. Plus, why does it have to be a market term? Judge: I can see it’s going to be a long day, and I’m going to more coffee to deal with this. Let’s take a break. Poll the Audience: Discuss what an appropriate interest rate, term and amortization would be with your group. What method should the Court use when determining an appropriate interest rate? (A) LIBOR rate plus risk premium (B) US Treasury rate plus risk premium (C) Prime rate plus risk premium (D) Market rate Best Practice Tip: If you want your plan to get confirmed without objection from secured creditors, and you are lowering secured creditors' interest rates, look to whether there is an efficient market and the current market rate. If there is no efficient market, you will likely want to use the US Treasury rate, LIBOR rate, or prime rate as the base and add a risk premium. And, if you extend the maturity date and increase the amortization, then try to put them in the market range, to avoid objections.

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If you are a secured creditor, and you object to a proposed interest rate and/or term, then be prepared to present evidence why your rates and terms should be different. Also, be aware that Till is still good case law, and you may be stuck with the prime rate plus a 1-3% risk adjustment. Cases: Till v. SCS Credit Corp., 541 U.S. 465 (2004); In re Dunlap Oil Company, Inc. BAP No. AZ-14-1172 (B.A.P. 9th Cir. December 5, 2014). Issue #2: Gerrymandering of classes. Judge: Counsel, let's move on to the next objection of Quicky Loans regarding gerrymandering of the classes. The plan proposes to pay Quicky Loans its secured claim of $20,000, over 5 years. This claim is Class 2. The remaining unsecured claim will be in a separate class by itself, Class 4, which will be paid $7,5000 from equity on the effective date, plus $15,000 from the debtor over 5 years. So, what's the objection, counsel? QL’s Counsel: Your Honor, the objection is that the plan is gerrymandered. Quicky Loans’s unsecured claim is put into its own class, when it should be put with the other general unsecured creditors in Class 3. Debtor’s Counsel: There's no gerrymandering. Quicky Loan’s unsecured claim is different from the other unsecured claims because the principal of the Debtor guaranteed it. It's not substantially similar to the other 20 general unsecured claims. Because of the guaranty, there is another source for payment of the loan. Therefore, the claim is not substantially similar. That’s why it’s in it's own class and separate from the other general unsecured claims. QL’s Counsel: I'm still not convinced that it's not substantially similar. Do you have a business or economic justification for putting the claim in its own class? Because, if you don’t, then you can’t classify it separately from the other general unsecured claims. Debtor’s Counsel: Sure, the Debtor a business justification! The Debtor wants to successfully reorganize! Isn't that sufficient? QL's Counsel: No, I don't think so. Also, you may have a problem showing that Quicky Loan's unsecured claims is truly not substantially similar. You may have a guarantee signed by the Debtor, but the Debtor is married and his wife didn't sign the guaranty. Debtor's Counsel: Yes, that's all true. So what? It's still legally dissimilar from the other unsecured claims because of the guaranty. QL's Counsel: As you well know, Arizona is a community property state. So, if the wife didn't sign the guaranty, it doesn't bind the marital community. That means the guaranty is worthless if the husband doesn't have sole and separate property because then there's no other real source of recovery. Does he have any sole and separate property?

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Debtor's Counsel: No, nothing of value. Your client didn't do a very good job with its due diligence. The joke's on them! QL's Counsel: The joke's on you, because that claim needs to be classified with the other general unsecured claims. If you can't collect on the guaranty, because the husband doesn't have any sole and separate property, then the guaranty doesn't have any effect and the claim is substantially similar to the other unsecured claims. Debtor's Counsel: How dare you! That's really shortsighted of you. Things change. What if the husband and wife divorce and he then has sole and separate property after? Or what if the husband acquires or inherits sole and separate property down the road? The guaranty can still be a potential source of payment on the loan. Judge: Well, I’m going to have to mull this over and decide whether the claim is substantially similar or not. Let’s take a 3 minute recess. Poll the audience: Is the unsecured claim of Quicky Loans properly classified in a separate class, or is it substantially similar to the other unsecured claims? (A) The unsecured claim of Quicky Loans is not substantially similar and is properly classified in a separate class. (B) The unsecured claim of Quicky Loan is substantially similar to other unsecured claims and should be in the same class as the general unsecured claims. Best Practices Tip: When classifying an unsecured claim in its own class, make sure it is either not “substantially similar” or have a business or economic justification for classifying it separately. If you have a claim that is guaranteed by a non-debtor and have another source of recovery, that might render the claim dissimilar from other general unsecured claims, and allow you to put it in its own class. However, in the situation where you have a guaranty which might not be a source of payment (for example, if it is signed by only one spouse in a community property state and there's no separate property of the signing spouse), it is uncertain if the claim is legally dissimilar such that it can be separately classified. Statutes and Cases: 11 U.S.C. § 1122(a); In re Loop 76, LLC, 465 B.R. 525 (9th Cir. B.A.P. 2012); In re Johnston, 21 F.3d 323 (9th Cir. 1994). Issue #3: Funding of plan through liquidation of 1% interest in marijuana dispensary. Judge: Counsel, there is one provision of the plan that I have issue with as well. The Debtor has a passive 1% investment interest in a marijuana dispensary, which the Debtor intends to liquidate to fund the plan. The problem with that is that I don’t see how I can approve the plan without violating federal law.

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Debtor’s Counsel: Your honor, I disagree. This isn’t a case where a trustee would have to administer assets of a marijuana business, which would violate federal law. Scavenger Bank’s Counsel: That might be true, but the funding of the Debtor’s plan depends upon the value and liquidation of an illegal enterprise. In a recent published case in Michigan, In re Johnson, the Court found that it could not approve a plan which was funded by with income from a marijuana business. Debtor’s Counsel: Your honor, this not like the Johnson case, in which the debtor, who operated a medical marijuana business legally under state law, filed a chapter 13 and proposed to segregate funds from his medical marijuana business and only fund the plan with other funds. Scavenger Bank’s Counsel: You're right, it's worse in this case. The funds from the liquidation of the interest in the marijuana facility wouldn’t be segregated. They would be used to help fund the plan. Debtor’s Counsel: In Johnson, the Court there said that if the debtor discontinued his medical marijuana business while the case was pending, then he could stay in bankruptcy. Here, the debtor is liquidating its passive interest and will no longer have an interest in an ongoing medical marijuana business. Judge: I’m not sure that there is a clear answer out there. I’m going to have to take this one under advisement. Poll audience: Is the Court able to approve the plan without violating federal law? (A) Yes. (B) No. Best Practices Tip: Although there is very little published case law, one recent published decision indicated that debtors who have sources of income that are separate from the income derived from a marijuana business and that are sufficient to cover the necessary payments may remain in a chapter 13 case. It is unclear whether that would be true in a chapter 11. The judges seem to be in agreement that they cannot administer assets relating to a marijuana business or proceeds of the asset without violating federal law. The best practice for a debtor who wishes to use funds from a marijuana dispensary would be to liquidate any interests in that business and use the funds prior to filing, so they aren't involved in the bankruptcy case at all. But, be forewarned - you could still run into some problems. Cases: In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015); In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015); In re McGarey, Case No. 2:13-bk-15074-BKM (Bankruptcy Court, District of Arizona). Article: “It’s All Going to Pot,” American Bankruptcy Institute Journal, December 2015, B. Summer Chandler, pg. 46-47, 101.

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Issue #4: Release of non-debtor party. Judge: Well, counsel, let's move on to the next objection of Quicky Loans. Quicky Loans' Counsel: Thank you, your Honor. The plan also provides for injunctive relief as well as a full release of the Debtor’s principal. You can't get a release of a non-debtor through the plan. Debtor’s Counsel: Well, it’s the majority rule that you can include releases of non-debtor third parties under certain circumstances, and I know it’s allowed in almost all of the Circuits. Are you sure it’s not allowed in the 9th Circuit? Quicky Loans' Counsel: I’m not entirely sure, but the 9th Circuit likes to do things differently, so yeah, it’s probably not allowed. Judge: Well, I’ll have to take it under advisement…for the next 5 minutes, while I have my law clerk look it up. Poll audience: Is the plan confirmable with the provision providing for releases of the debtor's principal? (A) Yes. (B) No. Best Practices Tip: The best practice here in the 9th Circuit is to not include releases of the Debtor's principals in your plan. Although this is allowed in the 2nd, 3rd, 4th, 6th, 7th, and 11th Circuits in certain circumstances, and the 1st Circuit and D.C. Circuit have indicated they agree, it’s not allowed in the 5th, 9th or 10th Circuits. These Circuits have looked to Section 524(e) when determining that non-debtor releases are not permissible. Section 524(e) provides: "[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." For an example of a limited third party exculpation clause for post-petition conduct approved in the District of Arizona see the Skymall case - Xhibit Corp., et. al. (Case No. 2:15-bk-00679-BKM). Statutes and Cases: 11 U.S.C. § 524(e); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re American Hardwoods, Inc., 885 F.2d 621 (9th Cir. 1989). Compare with the 11th Circuit – In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015). See also Xhibit Corp., et. al. (Case No. 2:15-bk-00679-BKM, Bankruptcy Court, District of Arizona). Issue #5 – Section 1111(b) Election Judge: Okay, let's move on to the last issue. We're almost done, thank god. Quicky Loans has made the § 1111(b) election. So let me get this clear - Quicky is trying to be treated as fully secured and force the Debtor to pay the full $1 million dollars that's owed and not have an unsecured claim. The Debtor claims that Quicky Loan’s interest in the Apartment Complex is of

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“inconsequential value.” If that's true, then Quicky can't use the § 1111(b) election and will be stuck with its treatment under the Plan. Counsel? QL’s Counsel: Judge, I don't care what the Plan says. Quicky Loans took the 1111(b) election to have its claim treated as fully secured, and the Plan is not feasible. The Debtor simply can’t make the payments that would be required to pay Quicky Loan’s entire claim of $1 million. Debtor’s Counsel: Oh, THAT argument again. How many times do I have to tell you? Quicky Loans has a precarious toe-hold of a secured claim. In fact, Quicky Loan’s interest in the collateral is only 2% of its total claim! After accounting for Scavenger Bank’s senior lien on the Phoenix Apartment, the $20,000 value on which Quicky Loan’s lien attaches is inconsequential.. If a claim has inconsequential value, the creditor isn't entitled to the 1111(b) election. Quicky Loans' 1111(b) election should be disallowed. QL’s Counsel: Au contraire. In the 9th Circuit, you don’t focus on the amount of the total claim or a comparison of the amount of the secured claim to the value of the collateral. The Court must focus on the value of the property to which the lien attaches. The collateral has significant value, of $1 million. It’s probably the only legal asset the debtor owns. And the Apartment Complex is only 30% occupied now, so with increased occupancy, the property will only increase in value. SB’s Counsel: Can I make a suggestion? Since the junior lender made a § 1111(b) election and wants its claim to be treated as fully secured, why doesn’t the debtor surrender this property? Because of the § 1111(b) election, the property fully secures the junior lender’s claim, so there can be no deficiency and no claims against guarantors – solves multiple problems all at once, right? Judge: Section 1111(b)… yuck. Who really understands it anyway? I didn’t sign up for the job to do this. I'm curious what all of these people sitting here in the Courtroom today think. I think I’ll take a quick vote from the audience. Poll audience: Should the Court disallow Quicky Loan’s § 1111(b) election? (A) Yes. (B) No. Best Practices Tip: If you are representing the debtor, consider if any creditors could and would have reason to make the § 1111(b) election and whether you can make the secured payments if the § 1111(b) election is made. If not, consider whether the property has value and whether it is likely to depreciate or appreciate in value. If you are representing a creditor that makes the § 1111(b) election, and you have a “thin” secured claim, make sure the property has value, or your election may be disallowed. Cases: In re Tuma, 916 F.2d 488 (9th Cir. 1990); McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 277 (D. Ariz. 2015).

Admirable Attorney for Thirsty Trustee

Plaintiff

Suing For: Denial of Discharge under 11 USC

727 and Turnover of Assets under 11 USC 542

Debbie Deceitful

Defendant

Accused of: Concealing assets and income

What you are witnessing is real.

The participants are not actors

(not good ones anyway). They are

actual litigants with a case

pending in the Arizona

Bankruptcy Court (just not this

case). The parties have agreed

to have their disputes settled

here…

What penalty does the Code require for a debt relief agency’s failure to provide the notices required by § 527?

A. No penalty.

B. The Debt Relief Agency is subject to sanctions at the court’s discretion.

C. The Debt Relief Agency must return to the client all fees received (at minimum).

D. The Debt Relief Agency must return $500 to the client as a penalty.

C is the correct answer.

Best Practice Tip: If “any debt relief agency” intentionally or negligently fails (among other things) to provide the required notices, it shall be liable to client for all fees paid as “actual damages,” and for reasonable attorneys’ fees and costs.

See In re Gutierrez, 356 B.R. 496, 500 (Bankr. N.D. Cal. 2006) and “How Much Diligence is Due?” American Bankruptcy Institute Journal, November, 2013, G. Thomas Curran, Jr., pg. 24-25, 74.

What should Lazy Lawyer have done after becoming aware of the undisclosed assets?

A. Withdrawn from the case immediately.

B. Amended Schedule A/B to add all undisclosed assets.

C. Amended Schedules A/B and C to disclose the assets and exempt the engagement ring.

D. Advised Debbie not to provide 2015 tax returns to the Trustee and hope the case gets dismissed.

C is the correct answer.

Best Practice Tip: Bankruptcy Rule 1009 provides “Schedules can be amended at any time. BAP has held that the Court is “without authority” to deny an amended exemption on the basis of bad faith.

See 11 U.S.C. §§ 521, 522, and 526, and Bankruptcy Rule 1009.

See also Gray v. Warfield (In Re Gray), 523 B.R. 170 (9th Cir. B.A.P. 2014).

What should Lazy Lawyer have done at this hearing?

A. Claim the 5th Amendment immediately and provide no answers.

B. Immediately claim duty of confidentiality under ER 1.6 and provide no answers.

C. Disclose everything he knows – he’s defending himself!

D. Immediately claim attorney-client privilege and provide no answers.

B is the correct answer.

Best Practice Tip: Debtors attorney should have asserted his duty of confidentiality to his client under E.R. 1.6. The attorney would be allowed to remain silent until a Court order instructing him to disclose information was entered.

See U.S. Const. Amend. V.; Fed. R. Evid. 502; A.R.S. Sup. Ct. Rules, Rule 42, Rules of Prof. Conduct, E.R. 1.6 of the Arizona Rules of Professional Responsibility.

Five cases also cited in your materials.

Counsel for It’s All About the Money, LLC

Debtor

Just wants a chance!

Counsel for Scavenger Bank

Secured Creditor

Wants it’s money… with interest. Lots of

interest.

Counsel for Quicky Loans

(Very) Undersecured Creditor

Wants to dash Debtor’s hopes and dreams.

What you are witnessing is real.

The participants are not actors

(not good ones anyway). They are

actual litigants with a case

pending in the Arizona

Bankruptcy Court (just not this

case). The parties have agreed

to have their disputes settled

here…

Discuss what an appropriate interest rate, term and amortization would be with your group. What method should the Court use when determining an appropriate interest rate? (A) LIBOR rate plus risk premium (B) US Treasury rate plus risk premium (C) Prime rate plus risk premium (D) Market rate

Answer: C Best Practice Tip: If you want your plan to get confirmed without objection from secured creditors, and you are lowering secured creditors' interest rates, look to whether there is an efficient market and the current market rate. If there is no efficient market, you will likely want to use the US Treasury rate, LIBOR rate, or prime rate as the base and add a risk premium. And, if you extend the maturity date and increase the amortization, then try to put them in the market range, to avoid objections. If you are a secured creditor, and you object to a proposed interest rate and/or term, then be prepared to present evidence why your rates and terms should be different. Also, be aware that Till is still good case law, and you may be stuck with the prime rate plus a 1-3% risk adjustment. Cases: Till v. SCS Credit Corp., 541 U.S. 465 (2004); In re Dunlap Oil Company, Inc. BAP No. AZ-14-1172 (B.A.P. 9th Cir. December 5, 2014).

Is the unsecured claim of Quicky Loans properly classified in a separate class, or is it substantially similar to the other unsecured claims? (A) The unsecured claim of Quicky Loans is not substantially similar and is properly classified in a separate class. (B) The unsecured claim of Quicky Loan is substantially similar to other unsecured claims and should be in the same class as the general unsecured claims.

Answer: ? Best Practices Tip: When classifying an unsecured claim in its own class, make sure it is either not “substantially similar” or have a business or economic justification for classifying it separately. If you have a claim that is guaranteed by a non-debtor and have another source of recovery, that might render the claim dissimilar from other general unsecured claims, and allow you to put it in its own class. However, in the situation where you have a guaranty which might not be a source of payment (for example, if it is signed by only one spouse in a community property state and there's no separate property of the signing spouse), it is uncertain if the claim is legally dissimilar such that it can be separately classified. Statutes and Cases: 11 U.S.C. § 1122(a); In re Loop 76, LLC, 465 B.R. 525 (9th Cir. B.A.P. 2012); In re Johnston, 21 F.3d 323 (9th Cir. 1994).

Is the Court able to approve the plan without violating federal law?

(A) Yes

(B) No

Answer: Probably No

Best Practices Tip: Although there is very little published case law, one recent published decision indicated that debtors who have sources of income that are separate from the income derived from a marijuana business and that are sufficient to cover the necessary payments may remain in a chapter 13 case. It is unclear whether that would be true in a chapter 11. The judges seem to be in agreement that they cannot administer assets relating to a marijuana business or proceeds of the asset without violating federal law. The best practice for a debtor who wishes to use funds from a marijuana dispensary would be to liquidate any interests in that business and use the funds prior to filing, so they aren't involved in the bankruptcy case at all. But, be forewarned - you could still run into some problems.

Cases: In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015); In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015); In re McGarey, Case No. 2:13-bk-15074-BKM (Bankruptcy Court, District of Arizona).

Is the plan confirmable with the provision providing for releases of the debtor's principal?

(A)Yes

(B)No

Answer: B

Best Practices Tip: The best practice here in the 9th Circuit is to not include releases of the Debtor's principals in your plan. Although this is allowed in the 2nd, 3rd, 4th, 6th, 7th, and 11th Circuits in certain circumstances, and the 1st Circuit and D.C. Circuit have indicated they agree, it’s not allowed in the 5th, 9th or 10th Circuits. These Circuits have looked to Section 524(e) when determining that non-debtor releases are not permissible. Section 524(e) provides: "[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." For an example of a limited third party exculpation clause for post-petition conduct approved in the District of Arizona see the Skymall case - Xhibit Corp., et. al. (Case No. 2:15-bk-00679-BKM).

Statutes and Cases: 11 U.S.C. § 524(e); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re American Hardwoods, Inc., 885 F.2d 621 (9th Cir. 1989). Compare with the 11th Circuit – In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015). See also Xhibit Corp., et. al. (Case No. 2:15-bk-00679-BKM, Bankruptcy Court, District of Arizona).

Should the Court disallow Quicky Loan’s § 1111(b) election?

(A) Yes

(B) No

Answer: ?

Best Practices Tip: If you are representing the debtor, consider if any creditors could and would have reason to make the § 1111(b) election and whether you can make the secured payments if the § 1111(b) election is made. If not, consider whether the property has value and whether it is likely to depreciate or appreciate in value. If you are representing a creditor that makes the § 1111(b) election, and you have a “thin” secured claim, make sure the property has value, or your election may be disallowed.

Cases: In re Tuma, 916 F.2d 488 (9th Cir. 1990); McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 277 (D. Ariz. 2015).