Identifying Unusual Assets & Valuation of Uncommon Assets

This outline was originally presented by Atty. Greg Holbus and Trustee Steve McDonald at the March 11, 2014 Lou Jones seminar in Milwaukee.

Introduction
The original intent of this presentation was to create a reference guide for attorneys to use in determining the value of certain uncommon or otherwise difficult to value assets.  As attorneys, we prefer primary sources (statutes and case law) whenever possible, so the hope was to find case law that addressed these unusual assets.  After 15 minutes of searching for three assets, it became clear that this approach would go nowhere fast.  In hindsight, this was to be expected.  The lack of case law demonstrates two implicit truths – (1) assets (particularly non-liquid assets) are only worth as much money as someone is willing to pay for them and (2) judges are wisely reluctant to establish binding case law that couldn’t take market conditions into account.
Accordingly, this presentation has evolved to cover three basic topics: identifying assets (particularly those that most people wouldn’t ordinarily think of as an asset); providing a list of documents and information that an attorney should request to help determine an “on paper” value with the understanding that actual market value may be less; and reviewing some of the factors that influence the value of an asset and a trustee’s willingness to pursue an asset that is non-exempt on paper.
The debtor shall file a schedule of assets and liabilities (unless the court orders otherwise).  11 U.S.C. § 521(a)(1)(B)(i)
Asset: an item that is owned and has value.  Black’s Law Dictionary
(I)      Practice Pointers
·         As you proceed through this outline, you may think that some of the items listed here as potential assets go a bit too far or are over-reaching.  My favorite example of this is “unclaimed bonuses, rewards, and points from credit cards and store cards”.  This is the asset that, when it has been brought to the attention of other bankruptcy practitioners, has elicited more than a few giggles – primarily because the value of these assets is often the equivalent of a $25 voucher at Wal-Mart.
·         However, all assets have the potential to be quite valuable.  In the case of credit card rewards, consider a business owner.  His net profits are very low (hence why he is in bankruptcy), but his overall revenue and expense volume might be quite high.  If most of his expenses are put on a credit card and if he is entitled to 1% cash back on purchases, he could easily rack up $1,000 in value once every couple of months.  This alone might not be worthwhile, but if there are already other non-exempt assets, then this extra thousand dollars is nothing to sneeze at.  The point is – you would not have known about the asset if you didn’t ask.
·         Reminder for Debtors: Assets that are not disclosed cannot be taken as exempt.  You’re taking a big gamble not disclosing assets for fear that a trustee might seize them, because if the trustee does discover the asset later, attempts to exempt it later will likely be denied.  This is especially foolish if the asset would have been exempt in the first place.  Don’t presume to know better than your lawyer.
·         Few laymen have an appreciation for the term “assets”.  It has been my personal experience that most clients, upon hearing that I will be inquiring about their assets, have the knee-jerk response that they don’t have any assets.  Others believe that the term only applies to real estate or motor vehicles (i.e. things with legal title).
·         It is incumbent on the attorney to make sure that the client appreciates the full scope of the term.  Merely instructing your client to fill out a packet of forms with no added explanation or guidance is inadequate.
·         Clients generally do not volunteer information unless they believe it will help their case.  They don’t understand what is relevant to the bankruptcy process.  It is your job to flush information out of the client and to identify potential issues.
·         Clients generally do not read the print materials provided to them by their attorneys.  Though I strongly advocate giving plenty of material to read and/or fill out at their own pace, it is also important to review documents with them verbally.
·         Repetition is important.  Between verbal interviews and printed materials, my clients probably hear/read the same questions 5-7 times before their case is filed, and I do that because often, the client won’t think of something until the 5th or 6th time they have been asked about it.
(II)    Identifying Assets / Property of the Estate
·         See 11 U.S.C. § 541
·         Generally, all legal and equitable interests, interests in community property, interests in inheritances within 180 days of filing, certain property recovered by the trustee, and certain profits and proceeds generated by the estate except for services performed by the debtor after the case is filed.
·         Notable exclusions:
·         (b)(5) – funds deposited into an Educational IRA between 1 and 2 years prior to filing (limit of $6,225) and funds deposited within 1 year of filing if not in excess as described in 26 U.S.C. 4973(e).
·         (b)(7) – funds in an ERISA retirement plan, § 457 deferred compensation plan, or 403(b).
·         Real Estate – residences, former residences (that have not yet been foreclosed), business / rental properties, vacant lots, timeshares, hunting land, etc.
·         Most people believe that when they receive a notice of foreclosure, that the property is no longer theirs.  They are not aware of foreclosure procedures or redemption periods, and they’re not aware of which events actually trigger a change in legal title.
·         Motor Vehicles – cars, trucks, vans, motorcycles, boats, ATVs, snowmobiles, trailers, campers, RVs, mobile homes, scooters, mopes, aircraft, etc.
·         Liquid Assets – Cash, Bank Account Balances, Prepaid Debit Cards, Paypal Accounts, Whole Life Insurance, Stocks, Bonds, Redeemable Bonuses/Points/Rewards from Credit Cards & Store Cards, etc.
·         Don’t just ask about the current or next year’s refunds.  Some debtors are waiting on tax refunds from years prior – either because of a late-filed return, an amendment, or re-assessment.  This is a great example of an uncommon twist of an otherwise common asset.
·         Other Non-Liquid Assets – Ownership Interests in Corporate Entities, Trusts, Annuities, IP, Licenses, etc.
·         Contingent / Future Interests – Potential Inheritances, Pending Lawsuits, Unlitigated Claims, Tax Refunds, Life Estates, etc.
·         It is especially important to not overlook pending litigation or unlitigated claims.  Debtors could later be barred from bringing actions under judicial estoppel if a pre-petition claim was not listed on the debtor’s schedule of assets.
·         Although this outline is geared more toward liquidation in Chapter 7, it is also worth pointing out that many districts generally hold that contingent assets and windfalls that become realized during the pendency of a Chapter 13 are property of the estate.  Here in the Eastern District of Wisconsin, contingent assets are generally held to the “rule of halves” (debtor keeps half of the contingent asset, the other half comes into the plan for the added benefit of general unsecured creditors).
(III)  Why Bother with Insignificant Assets?
·         Schedule accuracy – § 521 doesn’t make a distinction between valuable and invaluable assets.
In covering § 341 hearings for other lawyers, I’ve seen a wide range of detail in household goods.  Some of them are very simplistic (Household Goods: $5,000).  I’ll leave it to the trustees to comment on how much detail they think is appropriate.  I certainly don’t think it’s necessary to itemize the number of pens and thumbtacks (and other “junk drawer items”) a debtor has, but I personally feel there should be some reasonable level of detail.  If for no other reason, you’re demonstrating that the debtor has taken some time to seriously consider what stuff they own.  Remember that the federal household goods exemption (11 U.S.C. § 522(d)(3)) is limited to individual items worth less than $575.  If all you write is “Household Goods: $5,000”, then you really haven’t demonstrated to the trustee that your use of the (d)(3) exemption is appropriate.
·         What might commonly be an insignificant asset could – in that one-in-a-million case – be a significant asset that you’re not going to find out about if you don’t ask.  Clients rarely volunteer relevant information.
·         Covering a wide gamut of potential assets will help your client appreciate how broad the term “asset” is, and it could jog their minds to reveal an asset you might not otherwise have discovered.
(IV)  How to Value Certain Assets – What Documents to Request & What Information to Look For
Bear in mind that these are “on paper” valuations.  In reality, what something is worth is what someone is willing to pay for it.
·         Real Estate & Vehicles
§  Be sure to scrutinize the mortgage and title documents to confirm you have a properly perfected lien.
§  If the recording date was less than 90 days before the date you’re filing bankruptcy, look to the contract to ensure that recording happened within 30 days.  (11 U.S.C. § 547(c)(3))
·         Stocks
§  Number of Shares x Price per Share
§  Look to stock statements for number of shares.
§  Price per share is as simple as a Google search.  You can find the exchange and stock symbol simply by searching for the company name plus “stock”.  For example, searching “Wal-Mart stock” will give you NYSE: WMT.  You can plug that back in at any time to Google to get the current price per share the day you file the bankruptcy case.
·         Savings Bonds
§  Ask for a copy of the bonds themselves.
§  All you need is the series, face value, serial number, and issue date – and each item is printed on the bond itself.
·         Ownership Interest in a Business
§  Sole Proprietorship – no separate business entity; “business assets” are personal.
§  Corporations, LLCs, etc. – total value of corporate assets less total amount of corporate liabilities; remember to ask about accounts receivable and accounts payable; review deeds and titles to verify whether real estate or vehicles are owned personally or by the corporate entity.
·         Life Estates
1.       You’ll need a copy of the deed to determine when the life estate was created.
2.       Determine the applicable interest rate under 26 U.S.C. § 7520 based on the month/year the life estate was created.
3.       You’ll need the grantors’ (usu. the parents) dates of birth to determine current age.
4.       Single Living Grantor – use IRS Publication 1457; Table S
Scroll until you find the applicable interest rate determined at step 2.
Locate the age determined at step 3.
The grantor’s interest is in the “Life Estate” column, the grantee’s interest is in the “Remainder” column.
5.       Multiple Living Grantors – use IRS Publication 1457; Table R(2)
You’ll have to reference both grantors’ ages, but otherwise, the process is similar to step 4.
Multiple R(2) tables, based on the applicable interest rate from step 2.
6.       Take into account any joint interests among grantees, and any valid mortgages or other liens encumbering the property.
·         Potential Inheritance
§  Potential benefactor’s age and overall health condition.
§  Potential assets and liabilities.
§  Potential number of beneficiaries.
§  Any known details of a will (per capita or per stirpes distribution, specific bequests).
§  Any known life insurance policies or retirement accounts listing the debtor as beneficiary.
·         Pending or Unlitigated Claims
§  Cause of action.
§  Whether a lawsuit has been filed, and its status if filed.
§  Potential actual damages and potential punitive awards.
§  Likelihood of favorable judgment, settlement, and collectability.
·         Tax Refunds
§  Trustees are entitled to a pro rata amount of the current year’s refunds (e.g. in a case filed on April 15, 2014, the trustee could recover about 28% of the 2014 refunds.  If using wildcard, this amount is usually exempt and the trustee won’t hold a case open that long to recover the refund.  But if using state exemptions, you’ll need to consider this.
·         Money in a Lawyer’s Trust Account
§  Is your client in the middle of a divorce?  Is your client suing someone for personal injury or breach of contract?  It’s worth asking if the client has retained counsel.  If they have, there may be money sitting in that lawyer’s trust account for advanced fees or costs that haven’t been earned.
·         Claim in the Bankruptcy Case of Another
§  Review the debtor’s proof of claim.
§  Check PACER to verify that the claim was timely filed and allowed; that there have been no objections.
§  Where available, review the plan (Chapters 11, 12, or 13) or schedules (Chapter 7) to determine likely distribution.
·         Equitable Interest (e.g. Land Contract)
§  Amount of down payment + total monthly payments paid in so far.
·         Season Tickets
§  License Fee + Face Value of Issued Ticket(s)
·         Whole Life Insurance Policies
§  Recent statements will have the current cash surrender value.
§  When using WI state exemptions, if the policy was issued within the last 24 months, only $4k is exempt.
·         Retirement Accounts
§  Most are not property of the estate under § 541(b)(7).
§  If uncertain if the plan qualifies for an exemption, the plan administrator can usually tell the debtor.
§  Monthly balance statements for value.
§  § 522(d)(10)(E) – payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor
§  § 522(d)(12) – exempt from taxation under 26 U.S.C. §§ 401, 403, 408, 408A, 414, 457, or 501(a).
§  § 815.18(3)(j) – Assets held or amounts payable under any retirement, pension, disability, death benefit, stock bonus, profit sharing plan, annuity, individual retirement account, individual retirement annuity, Keogh, 401-K or similar plan or contract providing benefits by reason of age, illness, disability, death or length of service and payments made to the debtor therefrom.
·         Residual Income
§  Property of the estate under 11 U.S.C. § 541(a)(6).
§  Would include the pro rata amount of the debtor’s next paycheck for work performed pre-petition.
§  More notably, applies to books of business in the insurance industry.  Agents are paid money for contract renewals, which is for work performed pre-petition.  It is possible to sell these books, and although I’ve not had the experience of having to sell one, I’m told that the value is generally computed at 24 months of the typical monthly residual payment.  https://www.agencyequity.com/listings/book-of-business-for-sale
§  If your client is a real estate broker, you’ll need to inquire about any commissions due to them prior to filing the bankruptcy case that have not yet been paid.
·         Trust Beneficiaries
§  Review the trust documents.
§  Most contain a spendthrift provision that prevents the trustee or creditors from making a claim to the debtor’s interest in future payments.
§  In absence of such a provision, the property currently in trust is property of the bankruptcy estate.
·         Annuities
·         Many are exempt as retirement accounts.  Check the establishment documents for ERISA language.
·         Account statements for value.
·         Intellectual Property (copyrights, trademarks, and patents)
·         If the IP has potentially significant value, consider consulting with an IP attorney to discuss valuation.
·         Has the debtor received offers to purchase rights to their IP?
·         Has the debtor received any royalties on account of their IP?
·         Franchise or License Rights
·         Often have restrictions on alienability.
·         Has the debtor received offers to purchase?
·         Does the agreement contain provisions to sell rights back to the franchisor?
(V)    Exemption Planning – Factors Affecting the Trustee’s Decision to Pursue or Abandon a Non-Exempt Asset
·         Nuisance Obstacles
§  Uncertain Markets
§  Non-liquid assets are only as valuable as someone is willing to pay for it.  What something is worth on paper is not necessarily what it is worth in real life, given current market conditions (for better or for worse).
§  Unsatisfied Liens
§  Liens reduce the available equity in property.  Some liens can be avoided.  Others cannot.
§  Joint Ownership Interests
§  Under certain circumstances, a trustee may sell a joint owner’s interest.  See 11 U.S.C. § 363(h).
§  Contingent and Future Ownership Interests
§  How long would creditors have to wait on a contingent asset?  How likely is the asset to actually be realized?
§  Limitations on Alienability
§  Environmental Hazards
·         Administrative Considerations
§  Cost of Liquidation
§  Total Amount to Distribute to Creditors

§  Meaningful Distribution – Percent Yield to Creditors

Student Loans in Bankruptcy

Recently, Anton Nikolai gave an informative presentation regarding student loans to bankruptcy attorneys at the Lou Jones Breakfast Club.  You can read the full text of the presentation, but I wanted to share some bullet points.
Most people are aware that student loans are non-dischargeable in bankruptcy under 11 U.S.C. § 523(a)(8), which can be broadly interpreted to any sort of debt incurred for an educational purpose or benefit.  I’ve even seen arguments in the past that credit card debt incurred to pay off a student loan could be held non-dischargeable – similar to the reasoning for making credit card debt for payment of taxes non-dischargeable (which is expressly provided for by statute at § 523(a)(14) and (14A).  The non-dischargeability of educational benefits applies to both governmental and private student loans.
There is an exception carved out by statute – undue hardship.  But this is more than your ordinary hardship standard.  In fact, the 7th Circuit has adopted one of the most stringent tests for undue hardship in these circumstances, called the Brunner test (from Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987)).  The test requires:
  1. Debtor cannot afford to maintain a minimal standard of living if forced to repay student loans.  (This is a tough burden, but not impossible to prove.)
  2. Circumstances exist indicating that this inability is likely to persist for the majority of the repayment period – a certainty of hopelessness.  (This is almost impossible to prove.)
  3. Debtor has made good faith efforts to repay the loan.

The automatic stay does stop student loan collection practices, but those collection practices may resume after discharge once the case is terminated and the automatic stay is lifted.
Federal student loans have powers that private student loans do not.  They do not need a state court judgment to garnish wages.  They may do so automatically through an “administrative garnishment”.  But this garnishment, too, would terminate while a bankruptcy case is pending.
In Chapter 13 Bankruptcy, student loans are considered general, non-priority, unsecured debt.  Meaning they get paid at the same rate as your other general unsecured debts (e.g. credit cards and medical bills).
Unless your Chapter 13 plan proposes to pay such creditors in full, you will have an unpaid balance on your student loans.  Upon exiting bankruptcy, your student loan account may be in default, and subject to default interest rates.
There have been some instances of debtors in bankruptcy proposing to pay their student loan creditors separately, outside of their Chapter 13 repayment plan.  To do so requires that the student loans be treated as a special class of creditor.  This can only happen if the last contractual due date of the loan is after your last scheduled Chapter 13 plan payment.  While the bankruptcy code does permit for special classes of creditors to be created, it also prohibits debtors from creating special classes that discriminate unfairly.  At this time, there is no judicial consensus that student loans can be a special class.  Some judges allow it.  Others do not.
If your plan does not provide for payment in full of your student loans, you will want to make sure that your student loan creditors file proofs of claim in your Chapter 13 bankruptcy.  Although they are stayed from collecting while you are in bankruptcy – whether they file a claim or not – if they don’t file a claim, it means that they will not get paid and your other creditors who do get paid will be paid more money.  Since student loans are non-dischargeable, it is in your interest that they get paid during your bankruptcy plan.Don’t rely on your attorney to determine if your student loan creditors filed claims.  First of all, your attorney is probably handling dozens or hundreds of cases at a time, each with dozens or hundreds of creditors.  It’s tough to verify a negative under these conditions.  Also – particularly with private student loans – it’s not always simple for your attorney to distinguish a student loan creditor amongst your list of other creditors.  Creditors have 90 days from the date of your first meeting of creditors to file a proof of claim.  If they don’t, your attorney has another 30 days to file claims on their behalf under Rule 3004 of the Federal Rules of Bankruptcy Procedure.  If there is anyone you want to get paid, you’ll want to make sure your attorney is aware.There are four types of federal student loans: Stafford, Parent Plus, Graduate Plus, and Perkins.  To determine which of your student loans are federal, check out http://www.nslds.ed.gov/.
There are a few ways to have a student loan administratively discharged (outside of bankruptcy), but these are rare: school closure, disability, unpaid tuition refund, and false certification.Student loans are in one of five repayment statuses: in-school deferment, repayment, other deferment, delinquency, and default.In a default, a federal student loan can intercept tax refunds, wages without a court order, and social security benefits.In a loan is in default, you can rehabilitate the loan to exit default status – but this is a once in a lifetime event.  You must make 9 out of 10 payments to do this.There are various repayment plans you can explore to pay your student loans in a manner that is more affordable.
  1. Standard Repayment (fixed payments for 10 years)
  2. Graduated Repayment (10 years, starts out small, then increases every 2 years)
  3. Extended Repayment (25 year term, fixed or graduated, must have more than $60k in student loan debt)
  4. Income Contingent Repayment (25 year term, based on income AND student loan balance, balance at end is forgiven)
  5. Income Based Repayment (25 year term, based solely on income, $0 payments are possible, unpaid balance is forgiven, pay 15% of calculated discretionary income (income beyond 150% of poverty guidelines), payments adjust each year based on prior year’s taxes)

Note: any forgiven balances in ICR or IBR are taxable income.

Notice Requirements & Addressing the Correct Creditor

Attorney Greg Holbus will be a guest lecturer at the November 9, 2010 Lou Jones Breakfast Club, which is a monthly meeting of the Wisconsin State Bar’s BICR (Bankruptcy, Insolvency, and Creditors’ Rights) Section to discuss current events and developments in the area of bankruptcy law and other related practices – usually for one free CLE credit.
This month’s topic provides a road map for debtors’ counsel on how to properly serve or notice creditors of bankruptcy filings, motions, and adversary proceedings. Although this lecture is geared toward other attorneys, we hope to illuminate the variety of horror stories that debtors’ counsel often faces when attempting to find the proper creditor and address in a world of massive and complex corporate structures (which creditors seem to like to hide themselves in).
Below are some excerpts from the presentation.

When trying to provide notice or service of process to creditors, debtors’ ability to do so properly becomes difficult in a world where creditors have a couple dozen similarly-named subsidiaries or shell companies in existence, and they have hundreds (if not thousands) of offices scattered throughout the country. Debtors’ counsel find themselves trapped in an absurdly comical game of hide-and-seek, trying to pin down elusive creditors that seem to deliberately hide behind complex and opaque corporate structures. The point of this presentation is to TRY to un-muddy the waters somewhat.

Debtor shall use the address appearing on any two or more communications (e.g. billing statement, collection letters, etc.) received in the 90 days prior to filing the bankruptcy case. 90 day period does not apply to creditors who would be in violation of non-bankruptcy law by sending communications, in which case, the address appearing on the two most recent communications shall be used. 11 U.S.C. § 342(c)(2).

Although the creditor has a duty to terminate and reverse damages resulting from a stay violation, it could not be sanctioned for willful violation since it was not noticed pursuant to § 342 (appears that notice was sent to addresses appearing on a credit report). In re Tillett, 2010 Bankr. LEXIS 1342 (Bankr. E.D. Va. Apr. 23, 2010).

[…] a filed proof of claim shall stand as a notice of preferred address from the creditor. Fed. R. Bankr. P. 2002(g)(1).

“While no summons is issued and served upon the “defendant” in a contested matter, service of a pleading initiating a contested matter is made in the same manner as service of a summons and complaint in an adversary proceeding.” Dean v. Global Fin. Credit, LLC (In re Dean), 359 B.R. 218, 221 (Bankr. C.D. Ill. 2006).

Summons and Complaint shall be served in a manner authorized by FRCP 4, all subsequent documents and pleadings shall be served in a manner authorized by FRCP 5. In addition to FRCP 4, summons and complaint may be served by first class prepaid postage in the following manner:

Domestic or Foreign Corporation, Partnership, or Unincorporated Association: address to an officer, managing agent, general agent, authorized agent by law, or authorized agent by appointment. If agent is authorized by statute and the statute requires, also address to the defendant. Fed. R. Bankr. P. 7004(b)(3).

Insured Depository Institution (any FDIC-insured bank or savings association): address to an officer of the institution by certified mail, or first class mail to its attorney if the attorney has made an appearance. Confirm FDIC-insured status at http://www3.fdic.gov/idasp/. This requirement can be waived by court order in response to an application, or by the creditor’s voluntary waiver. Fed. R. Bankr. P. 7004(h).

Complex corporate structures – different entities with similar names. The following is a basic corporate structure glossary. There are many names given to different organizational structures, depending on ownership, holdings and purpose. It is important to keep in mind that an organization is either a formally organized entity, or it is not. If it is formally organized, there will be a designated agent for service.  Parent. A formally organized entity that holds an ownership interest in another entity (subsidiary). The Parent company may have its own line of business, which may or may not be related to the business of the subsidiary.  Subsidiary. A formally organized entity that is owned, at least in part, by another company (parent). In large corporate structures, a subsidiary might also be a parent company for another company down the line.  Holding Company. A formally organized entity that exists primarily to own other companies. Similar to a parent company, but usually without its own line of business.  Division. Usually (but not always) an informally organized part of another company. The division may have its own books and records, but is usually not formally organized (no filing with the State. If you are dealing with a company that is called a division, there is usually another company name that you will need to find. For example, “ABC, a division of XYZ Corp.”Shell or Dummy Company. A formally organized entity that will usually not have any assets of business of its own. These sorts of companies are used to shield information regarding ownership, holdings, etc. It is important to realize that these entities are actual companies, at least on paper. Corporate existence can be challenged based on inadequate capitalization and other grounds, but that is an expensive fight, and may not be relevant from a debtor’s standpoint.

When serving a mortgage company on a contested matter or adversary proceeding, it’s helpful to know who’s who in the industry to know whose conduct is at question or whose rights are sought to be modified.Mortgage Originator – the lender whose name appears on the mortgage and note (remember, the mortgage establishes the real estate as security for the loan; the note is a promissory note outlining the terms of loan repayment).Mortgage Holder – present owner of the mortgage; has the right to foreclose.Note Holder – present owner of the note; usu. (but not always) the same as the mortgage holder.Mortgage Servicer – party that accepts payment on behalf of the note holder, also responsible for holding / distributing escrow funds.

Not sure who’s who in your particular mortgage? Send a Qualified Written Request under RESPA to the mortgage servicer. 12 U.S.C. § 2605(e).