Bruce Akerly, a partner with Cantey Hanger, has published the May, 2015 e-newsletter.
In this issue we conclude our examination of Alternative Dispute Resolution (ADR) with a discussion of court directed settlement conferences and arbitration. We also explore to aspect involving discharge – one involving fraud and section 727(a) of the Bankruptcy Code and the other involving misrepresentations in the context of financing and credit under section 523(a) of the Bankruptcy Code, focusing on when the debtor is silent as to material facts.
We are pleased to announce that Christopher A. Klement has joined our practice group as an associate. He is profiled in this newsletter.
Brown Bags Lunches/Speaking Opportunities: our section would love the opportunity to speak to your business on topics of interest in the field of creditors’ rights and bankruptcy. We can also arrange presentations on a variety of other topics from corporate law, estate planning, taxation, and labor and employment law. We can present at a lunch (which we would love to host) or tele- or video conference. Please feel free to contact me to discuss a topic and availability.
Next Month: Non-Judicial Post-Judgment Discovery and related topics. As always, should you have any questions, please feel free to contact me at any time. Enjoy! Bruce W. Akerly Chair, Creditors’ Rights & Bankruptcy Practice Group Cantey Hanger LLP, Dallas
ALTERNATIVE DISPUTE RESOLUTION (“ADR”) – Part III
This is part III of our article examining ADR. Part I focused on ADR in general. Part II focused on mediation as a well-recognized ADR tool. In this final part in the series, we will focus on remaining ADR alternatives, most notably arbitration, from Texas perspective. ADR methods should be considered in light of the facts, circumstances and allegations in each contested matter. They can be a valuable alternative to limit the expense and delay attributed to litigation.
Moderated Settlement Conference
Some state laws provide for a procedure similar to a mini-trial to aid settlement – the moderated settlement conference (“MSC”). The MSC provides a forum for case evaluation by a neutral panel of third parties. It is not arbitration, as discussed below. The MSC panel may issue an advisory opinion, which maybe used by the parties to further the settlement process. Section 154.025 of the Texas Civil Practice and Remedies Code (“Texas CPRC”) provides:
- (a) A moderated settlement conference is a forum for case evaluation and realistic settlement negotiations.
- (b) Each party and counsel for the party present the position of the party before a panel of impartial third parties.
- (c) The panel may issue an advisory opinion regarding the liability or damages of the parties or both.
- (d) The advisory opinion is not binding on the parties.
MSC differs from mediation because it permits the neutral third parties to actually decide the controversy. The parties must agree to the process. The MSC is conducted in confidence. The result may not be revealed, even to the court.
Summary Jury Trial
Summary jury trials involve the presentation of cases, in an abbreviated fashion, to a panel of jurors (usually 6 in number) who may issue a nonbinding advisory decision. The summary jury trial works best in factually complex litigation and provides a vehicle to obtain a snapshot prediction of the outcome of a full jury trial. Section 154.026 of the Texas CPRC provides:
- (a) A summary jury trial is a forum for early case evaluation and development of realistic settlement negotiations.
- (b) Each party and counsel for the party present the position of the party before a panel of jurors.
- (c) The number of jurors on the panel is six unless the parties agree otherwise.
- (d) The panel may issue an advisory opinion regarding the liability or damages of the parties or both.
- (e) The advisory opinion is not binding on the parties.
Summary jury trials are conducted similar to regular jury trial, only they are shorter in duration and less formal. They typically take less than a day to complete. Attorneys will select a jury in the same fashion as a full trial, but will know more about jurors to aid them in evaluating their case. Argument and evidence is presented in summary fashion and witnesses are not typically called to testify. The rules of evidence apply because they will apply at trial. The court instructs the jury and the jury returns a verdict. The verdict is advisory in nature (which the jury knows). After the verdict, the attorneys are free to discuss the case with jurors. Following the summary trial, negotiations toward settlement continue.
Discharge In Bankruptcy – Fraud On Creditors – Retention of Beneficial Interest
The goal of bankruptcy is discharge from pre-bankruptcy debts and other obligations. Section 727(a) of the Bankruptcy Code provides that individuals receive a discharge of claims in chapter 7 (and, in some instances, chapter 11) except in limited circumstances. Individuals also may be denied discharge as to specific debts through application of section 523(a) of the Bankruptcy Code. Corporations in chapter 7 do not receive a discharge of debts, per se, because they effectively close their business operations. Corporations in chapter 11 do not technically receive a discharge, but rather an injunction against creditors pursuing pre-petition claims. Pre-petition claims in chapter 11 are determined and treated in the context of a confirmed plan of reorganization which constitutes a new contract between the debtor and the creditor.
Section 727(a)(2)(A) provides that a discharge will be denied to an individual who “with intent to hinder, delay, or defraud a creditor…has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed – (A) property of the debtor, within one year before the date of the filing of the petition.” There are two components to this exception to discharge: (1) an act, i.e., a transfer or concealment, involving property of the debtor; and (2) a subjective intent to hinder, delay, or defraud a creditor. The act and intent must be present within the year before the petition is filed.
Courts have consistently held that discharge is ONLY available to the honest debtor. A debtor is not considered HONEST if he/she has engaged in actions which were, at the time taken, were intended to hinder, delay, or defraud their creditors. In this regard, courts have consistently held that the concealment of a secret beneficial interest in property that continues into the year before the bankruptcy is filed. Where the debtor retains an interest in the property transferred, e.g., the right to use the property, benefit from the property, receives income from the property, controls the use or disposition of the property. The concealment of the transfer of such property is actionable under section 727(a)(2)(A). Generally, a finding that the debtor retained a secret interest in the property that was concealed must include a finding that the concealment was done with actual intent to hinder, delay or defraud a creditor during the one year period preceding the filing of the bankruptcy. Also, the chapter 7 trustee may be able to recover the property or the value of the property transferred for the benefit of the bankruptcy estate from the transferee.
Discharge in Bankruptcy – Money Or Credit Extended On False Pretenses – Exception To Discharge Of Specific Debt – Debtor’s Silence
Section 523(a)(2)(A) of the Bankruptcy Code provides that a specific debt may be excepted from discharge in an individual’s chapter 7 case when the debt is shown to have been “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” The key elements to a claim under this section are: (a) a false representation by the debtor, (b) with knowledge of its falsity, (c) deliberately for the purpose of deceiving the creditor, (d) who justifiably relied on the representation, and which (e) proximately caused the creditor damage.
Courts have held that a debtor’s silence regarding a material fact can constitute a false representation for purposes of section 523(a)(2)(A). However, the reliance of the creditor on the statements of the debtor – or lack thereof by silence – must be justifiable under the attendant facts and circumstances. The justifiable reliance standard is one which falls somewhere between actual reliance and reasonable reliance. In some instances, particularly when the contention is that the debtor withheld material facts, reliance can be justified even though an investigation would have revealed the falsity of a representation or lack of any representation – i.e., silent on the matter. However, a creditor should understand that reliance cannot be blind. A creditor should not assert justifiable reliance if the misrepresentation would be patent to the creditor if he had utilized his opportunity to make a cursory examination or investigation. The key is the word cursory. Failure to take any steps to investigate what the debtor is representing may not be sufficient. Whether and to what extent the examination or investigation is and will be fact intensive dependent on the nature of the creditor’s business and level of experience.
Quote of the Month: “The future is purchased by the present.” —-Samuel Johnson In The News
- On June 18, 2015, Bruce Akerly will be presenting a 3 hours tele-seminar for National Business Institute entitled Advanced Collection Law. Topics, with materials, include: The FDCPA, Tips for Use of Social Media in Debt Collections, Alter Ego and Veil Piercing, Post-Judgment Receiverships and Turnover Proceedings, and Post-Judgment Discovery Strategies. If you are interested in attending you can sign up at www.nbi-sems.com.
- Bruce Akerly has been selected, again, as a Texas Monthly Super Lawyer in the area of bankruptcy and creditors’ rights.
- Christopher A. Klement has joined our practice group as an associate!
Profile – Christopher A. Klement, Associate Worked for Bank of America from 2005 to 2013 in positions ranging from part-time teller to manager to treasury services analyst before moving to LegacyTexas Bank, formerly ViewPoint Bank, as a corporate counsel until 2015. Graduated from SMU Dedman School of Law as a member of the Order of Barristers and won the Professor Fred C. Moss award for top graduating advocate. Since 2013, has coached advocacy teams for SMU Dedman School of Law, including five mock trial teams and one negotiations team. Began golfing competitively at age 10 in Jr. PGA tournaments, continued playing for the high school golf team, and still plays in an annual invitational tournament.