Central District Consumer Bankruptcy Attorney's Association

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Holly:
That is correct. A transfer of assets is a transfer of assets. An
assumption of debts is an assumption of debts. How did the business get
into the new corporation? What was the nature of that transaction?
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
Holly Roark
Sent: Tuesday, August 17, 2010 10:56 AM
To: cdcbaa@yahoogroups.com
Subject: Re: [cdcbaa] Do you ever file personal chapter 7s for people who
want to keep their small business running?
Mark T.Jessee wrote:
"There is no distinction between the debts of a debtor and debts of the
debtor's sole proprietorship. Debts of the sole proprietorship do not
attach to any particular assets unless specifically secured by that asset
through a valid security agreement or by operation of law."
Is it your opinion that if the sole proprietor was in debt to say, Yellow
Pages for $5,000, under an agreement between Yellow Pages and the sole
proprietor's DBA, when the sole proprietor incorporates, that debt won't be
transferred to the corp, but will be discharged in the personal BK despite
it being a "business debt"?
Holly Roark
holly@roarklawoffices.com
On Tue, Aug 17, 2010 at 2:08 AM, Mark T.Jessee
wrote:
Perhaps I missed some nuanced fact in this string, but unless there are
business assets which a trustee would liquidate in a chapter 7, I am not
following Dennis' logic. I usually see more harm than benefit to the debtor
by waiting to incorporate postpetition instead of incorporating prepetition.
Incorporating prior to the bankruptcy appears to usually provide the
smoothest outcome for the debtor if there are no nonexempt business assets.
Shutting down the business will cause the loss of income to the debtor and
the loss of key components to the business, i.e. the telephone number,
office space, employees, customer lists, etc. That is not something the
debtor can conveniently replace when incorporating a new business
postpetition. Incorporating prepetition prevents these hits to the business
operation. There is no distinction between the debts of a debtor and debts
of the debtor's sole proprietorship. Debts of the sole proprietorship do
not attach to any particular assets unless specifically secured by that
asset through a valid security agreement or by operation of law. If a
prospective debtor incorporates a sole proprietorship prepetition, the
assets transferred and used to fund the corporation are in return for the
stock being issued in the prospective debtor's name. The debts do not
attach to the corporation. The shares of the stock of the corporation are
the prospective debtor's asset instead of the specific business assets. As
most small businesses in this situation do not usually have any significant
goodwill value without the business principal working in transition with a
new owner, and since a chapter 7 trustee cannot force a debtor to work for a
new business owner, it really comes down to an analysis of the likely value
after liquidation of assets. Liquidating a sole proprietorship only
involves assets. Liquidating a corporation requires payment to corporate
creditors first before anything is distributed to the shareholder trustee.
With appropriate prebankruptcy planning incorporating a new business will
have normal creditors, office lease, employee salaries, payroll and/or sales
taxes, utilities, etc. From a practical point it makes an incorporated
business less enticing to liquidate than a sole proprietorship.
Looking at sole proprietorship vs. corporation in completing the means test
also favors prepetition incorporation. Ever since the Wiegand BAP decision
2 years ago holding that business expenses cannot be deducted from business
income in determining current monthly income, speakers at our group's
monthly meetings constantly recommend incorporating a sole proprietorship
prior to filing a bankruptcy case. That way only the gross revenue received
by the debtor is counted instead the gross receipts of the business in
determining cmi and whether a debtor is above or below median income.
Granted Weigand was a chapter 13 case, but the same principal applies in
chapter 7 marginal cases if a trustee or creditor asserts that business
expenses should not be included in determining cmi in chapter 7 based on the
Weigand analysis.
Absent nonexempt business assets likely to be administered by a chapter 7
trustee, I recommend incorporation to prospective debtors that have
employees or have the type of sole proprietorship business a trustee is
likely to shut down due to liability issues.
Mark T. Jessee
Law Offices of Mark T. Jessee
"A Debt Relief Agency"
50 W. Hillcrest Drive, Suite 200
Thousand Oaks, CA 91360
(805) 497-5868
On Mon 16/08/10 1:21 PM , Dennis McGoldrick easky1@yahoo.com sent:
bk first. New Inc. after bk filed. All of old co's nonexempt assets,
phone, etc., to trustee.

The post was migrated from Yahoo.

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The issue of preserving a sole proprietorship business through bankruptcy
is, as you can tell by the dialogue, entirely unclear and ultimately depends
on the whim of the Trustee.
As Dennis has pointed out, business assets are property of the estate and
the liability risks of an ongoing business may well prompt a Trustee to
insist that the business be shut down. A VERY aggressive Trustee may even
challenge a debtor's discharge for continuing to use property of the estate
(i.e. the business assets) after a case is filed - I have yet to see this,
but would not be surprised if it happens given the temperament of some of
our trustees. Dennis is also correct in noting that the stock of the newly
formed entity is property of the estate which passes to the Trustee. If the
Trustee wants to do so, the Trustee is entitled to immediately dissolve the
new entity and restore the corporate assets to the debtor and the estate.
As the corporation is newly formed, it is unlikely to have significant
corporate debt as Mark has suggested. In short, pre-petition incorporation
does not really insulate the business from a Trustee's reach.
At the same time, as Mark has pointed out, prepetition incorporation does
have salutary effects. First, as Mark notes, it does help with the means
test after Weigand. Second, incorporation does require affirmative action
by the Trustee (to dissolve the corporation) before the Trustee can insist
that the business be shut down or its assets liquidated. Thus prefiling
incorporation offers a smoother passage through bankruptcy. The downside to
this strategy may be the 727(a)(2) since incorporation shortly before
filing may be viewed as a transfer designed to hinder, delay or (less
likely) defraud creditors or the trustee.
During this string, someone suggested that the liabilities would follow the
assets if transferred to a newly formed corporation. I can only think of
three instances where that might be true: (1) the assets are collateral for
the debt; (2) there is successor liability under applicable non-bankruptcy
law; or (3) the corporation is found to be the debtor's alter ego - perhaps
undercapitalization?
On a purely rhetorical note (with a tip 'o the hat to Warren), why should
debtors be allowed to keep businesses or business assets for businesses
which have failed or not succeeded sufficiently to enable them to pay their
debts?
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
Mark T.Jessee
Sent: Tuesday, August 17, 2010 2:09 AM
To: cdcbaa@yahoogroups.com
Subject: Re: [cdcbaa] Do you ever file personal chapter 7s for people who
want to keep their small business running?
Perhaps I missed some nuanced fact in this string, but unless there are
business assets which a trustee would liquidate in a chapter 7, I am not
following Dennis' logic. I usually see more harm than benefit to the debtor
by waiting to incorporate postpetition instead of incorporating prepetition.
Incorporating prior to the bankruptcy appears to usually provide the
smoothest outcome for the debtor if there are no nonexempt business assets.
Shutting down the business will cause the loss of income to the debtor and
the loss of key components to the business, i.e. the telephone number,
office space, employees, customer lists, etc. That is not something the
debtor can conveniently replace when incorporating a new business
postpetition. Incorporating prepetition prevents these hits to the business
operation. There is no distinction between the debts of a debtor and debts
of the debtor's sole proprietorship. Debts of the sole proprietorship do
not attach to any particular assets unless specifically secured by that
asset through a valid security agreement or by operation of law. If a
prospective debtor incorporates a sole proprietorship prepetition, the
assets transferred and used to fund the corporation are in return for the
stock being issued in the prospective debtor's name. The debts do not
attach to the corporation. The shares of the stock of the corporation are
the prospective debtor's asset instead of the specific business assets. As
most small businesses in this situation do not usually have any significant
goodwill value without the business principal working in transition with a
new owner, and since a chapter 7 trustee cannot force a debtor to work for a
new business owner, it really comes down to an analysis of the likely value
after liquidation of assets. Liquidating a sole proprietorship only
involves assets. Liquidating a corporation requires payment to corporate
creditors first before anything is distributed to the shareholder trustee.
With appropriate prebankruptcy planning incorporating a new business will
have normal creditors, office lease, employee salaries, payroll and/or sales
taxes, utilities, etc. From a practical point it makes an incorporated
business less enticing to liquidate than a sole proprietorship.
Looking at sole proprietorship vs. corporation in completing the means test
also favors prepetition incorporation. Ever since the Wiegand BAP decision
2 years ago holding that business expenses cannot be deducted from business
income in determining current monthly income, speakers at our group's
monthly meetings constantly recommend incorporating a sole proprietorship
prior to filing a bankruptcy case. That way only the gross revenue received
by the debtor is counted instead the gross receipts of the business in
determining cmi and whether a debtor is above or below median income.
Granted Weigand was a chapter 13 case, but the same principal applies in
chapter 7 marginal cases if a trustee or creditor asserts that business
expenses should not be included in determining cmi in chapter 7 based on the
Weigand analysis.
Absent nonexempt business assets likely to be administered by a chapter 7
trustee, I recommend incorporation to prospective debtors that have
employees or have the type of sole proprietorship business a trustee is
likely to shut down due to liability issues.
Mark T. Jessee
Law Offices of Mark T. Jessee
"A Debt Relief Agency"
50 W. Hillcrest Drive, Suite 200
Thousand Oaks, CA 91360
(805) 497-5868
On Mon 16/08/10 1:21 PM , Dennis McGoldrick easky1@yahoo.com sent:
bk first. New Inc. after bk filed. All of old co's nonexempt assets,
phone, etc., to trustee.

The post was migrated from Yahoo.

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I had a client who runs a karate studio in his own name - Elmer Fudd Family
Karate Studio. Hes going to file in the Valley. So I called one of the
northern division trustees offices this month and asked, if this case got
to this trustee, whether I should incorporate the business. The trustee said
no, so long as there was liability insurance. But I thought you trustees
always wanted to shut down ongoing businesses in a 7, I said the trustee
replied that this hard-line stance is no longer in vogue across the Central
District. So long as the business name uses the individuals name, according
to the trustee, go ahead and file the chapter 7 case and exempt the assets
as you can.
The tide may turn again, but this is where it is in August 2010 according to
one trustee.
- John D. Faucher
On 8/14/10 10:20 AM, "Dennis" wrote:
>
>
>
>
>
> This is a complex issue for a trustee. Once the case is filed the business is
> property of the estate. Believe it or not, the trustee then is like an owner
> and cannot negligently let the business be operated. Anyone gets injured on
> the premises and the trustee is a defendant. There is NO reason for a trustee
> to take this risk.
>
> But, think about it. If your client had a shoe shine stand at the airport,
> not likely the trustee sends someone to the airport to stop your client from
> shining shoes. Trustee gets just $60 per no asset case and cannot afford to
> send someone out to close each no asset shop. So, if there are assets to
> liquidate, the trustee will have money to close the business. If no money, it
> is a matter of the level of risk.
>
> D
>
> Sent from my iPhone
>
> On Aug 14, 2010, at 7:39 AM, "Law Offices of Jonathan Leventhal"
> wrote:
>
>>
>>
>>
>> I have done a 7 for a client that owned (and still owns) a wheel alignment
>> business. The Trustee did not even blink an eye about the business.
>>
>> However, I had the client sign a paper stating he understood the risks
>> involved with filing and having a business.
>>
>> Jonathan
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
>> Jonathan D. Leventhal, Esq.
>> This email and any attachments thereto may contain private, confidential, and
>> privileged material for the sole use of the intended recipient. Any review,
>> copying, or distribution of this email (or any attachments thereto) by others
>> is strictly prohibited. If you are not the intended recipient, please contact
>> the sender immediately and permanently delete the original and any copies of
>> this email and any attachments thereto.
>>
>>
f
>> Robert
>> Sent: Saturday, August 14, 2010 7:22 AM
>> To: cdcbaa@yahoogroups.com
>> Subject: [cdcbaa] Re: Do you ever file personal chapter 7s for people who
>> want to keep their small business running?
>>
>>
>>
>>
>> This is such a great great question Holly. I have danced around the edges on
>> this one too.
>>
>> I had a debtor (sole prop) with a low inventory (seemingly low liability)
>> business selling clothes at the weekend swap meet.
>> Inventory was less than 3K and the trustee did not want to wipe their nose
>> with it.
>>
>> However, I thought a 7 meant the business stopped, period.
>>
>> Nice to see the discussion and I am grateful to see the list react.
>>
>> --- In cdcbaa@yahoogroups.com , Holly Roark
>> wrote:
>>> >
>>> > Do you ever file personal chapter 7s for people who want to keep their
>>> small
>>> > business running?
>>> >
>>> > I have had a couple cases where I filed personal Chapter 7s for sole
>>> > proprietors where I did not run into any problems with a Chapter 7
>>> trustee.
>>> > One of the debtors was a caterer, another one was a hair stylist. The
>>> > assets in each were all exempted and the debtors received a discharge
>>> > without any interruption to their businesses.
>>> >
>>> > Does incorporating or forming an LLC really make much of a difference if
>>> the
>>> > business is run by only one person? I assume if the trustee was interested
>>> > then he could just vote the shares to liquidate so incorporating would not
>>> > really offer the debtor any real protection.
>>> >
>>> > I guess my question is: when is it really NOT a good idea to file such
>>> > cases? It was brought to my attention that technically the debtor doesn't
>>> > even have authority to continue with the business in a Chapter 7 (if it's
a
>>> > sole proprietorship) and any income generated from the business is an
>>> asset
>>> > of the estate. While this may be true, practically speaking, it has not
>>> > been an issue in any of my cases since the debtors did not make that much
>>> > money and there were no real assets to liquidate.
>>> >
>>> > For those who have been around a while, what is your take on this? Do you
>>> > always file Chapter 13s for people who want to keep their small businesses
>>> > running? Is there any benefit to having the debtor incorporate the
>>> business
>>> > before you file a Chapter 7? What horrible thing (other than liquidation,
>>> > shut down, and a malpractice suit) am I not seeing here?
>>> >
>>> > --
>>> > Holly Roark
>>> > holly@...
>>> > www.roarklawoffices.com
>>>
>>> > Central District of California
>>> > Consumer Bankruptcy Attorney
>>> >
>>
>>
>>
>
>
>
>
>
>
>>> - John D. Faucher
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Re: [cdcbaa] Re: Do you ever file personal chapter 7s for people who want to keep their small business running?
I had a client who runs a karate studio in his own name - “Elmer Fudd Family Karate Studi
The post was migrated from Yahoo.

This is a great question and I had a long dialogue recently with
another attorney on this matter. Chapter 7 simply does not allow a
debtor to continue operating ANY business. The correct thing to do
in these situations is, in fact, to have the debtor incorporate, and
then file the Chapter 7. However, this is not always economically
feasible and, for all practical purposes, may be unnecessary. This
usually comes down to what assets the debtor needs to use in their
"business". For many self-employed people their business is their
personal services, such as a musician or painter. Who is to say
that they didn't start a "new" business on the date their bankruptcy
petition was filed? The problem is, when you really analyze it,
there's almost no way they can start a new business without using
some pre-petition assets (e.g. customer list, pens, pencils, etc.)
and while these may all be exempt, there is nothing in the statutory
proscription from "operating a business" Chapter 7 that excludes
using all exempt assets in the business.
I'd be curious to hear others' responses on this as well.
*************************
Mark J. Markus
Law Office of Mark J. Markus
11684 Ventura Blvd. PMB #403
Studio City, CA 91604-2652
(818)509-1173 (818)509-1460 (fax)
web: http://www.bklaw.com/
This Firm is a Qualified Federal Debt Relief Agency (see what this means at http://bklaw.com/bankruptcy-blog/2008/0 ... efinition/)
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On 8/13/2010 5:58 PM, Holly Roark wrote:
>
>
> Do you ever file personal chapter 7s for people who want to keep
> their small business running?
> I have had a couple cases where I filed personal Chapter 7s for
> sole proprietors where I did not run into any problems with a
> Chapter 7 trustee. One of the debtors was a caterer, another one
> was a hair stylist. The assets in each were all exempted and the
> debtors received a discharge without any interruption to their
> businesses.
> Does incorporating or forming an LLC really make much of a
> difference if the business is run by only one person? I assume if
> the trustee was interested then he could just vote the shares to
> liquidate so incorporating would not really offer the debtor any
> real protection.
> I guess my question is: when is it really NOT a good idea to file
> such cases? It was brought to my attention that technically the
> debtor doesn't even have authority to continue with the business
> in a Chapter 7 (if it's a sole proprietorship) and any income
> generated from the business is an asset of the estate. While this
> may be true, practically speaking, it has not been an issue in any
> of my cases since the debtors did not make that much money and
> there were no real assets to liquidate.
> For those who have been around a while, what is your take on
> this? Do you always file Chapter 13s for people who want to keep
> their small businesses running? Is there any benefit to having
> the debtor incorporate the business before you file a Chapter
> 7? What horrible thing (other than liquidation, shut down, and a
> malpractice suit) am I not seeing here?
>
> --
> Holly Roark
> holly@roarklawoffices.com
> www.roarklawoffices.com
> Central District of California
> Consumer Bankruptcy Attorney
>
>
>

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